emergency fund Archives - The Free Financial Advisor

How My Finances Have Changed with Covid

May 20, 2020 by Jacob Sensiba Leave a Comment

Aside from the death and illness, it has caused, Covid-19 has done a number on the financial system and the economy.

I’m writing this on May 19th, and up to this point, over 30 million people have filed for unemployment benefits.

In my previous post, which can be found here, I detailed how you can plan in the event of job loss.

Even if you haven’t lost your job, more than likely, your finances have changed. In this article, I want to pull back the curtain on how my finances have changed during this environment.

My Job

Thankfully, I’m still working. I work for my family’s business. Technically speaking, we have four family businesses and I work three out of the four in various capacities.

Two out of those three businesses are very resilient during recessions, so I’m not terribly worried about my income from those two sources.

The last, however, will be influenced by movements in the market. If I do my job well, it shouldn’t vary a ton, but if I don’t, my clients will feel the pain, as will I.

The reason being is I, typically, charge a percentage of the assets under management (AUM). If account values go down, so does the fee I receive. The two go hand in hand, as they should. If I do a poor job, I should make less. It just makes sense.

With that said, my income hasn’t moved too much from the financial advising gig. It dropped a little bit last month, but I imagine it’ll come back up by the end of May, as the market has recovered.

Opinion: The Economy

I don’t know if I’ve mentioned it yet here, but my opinion of the economy is darker than some. I think there will be a cascade of bankruptcies in the public and private sectors.

With regard to the public sector, the companies that are rated BBB are already at record highs. When revenues stop coming in or significantly reduce, it’s hard for companies to make interest payments to lenders (holders of debt).

Companies will start defaulting on their debts, and the ability to pay, as well as other factors, help determine the credit rating. This will cause a slew of BBB rated companies to get downgraded.

Funds

With regard to fixed income mutual funds and ETFs, the vast majority of them have rules they need to abide by. One of those rules could be only investing in investment-grade companies.

Investment grade is anything from AAA to BBB. My fear is that when companies get downgraded from BBB to BB, it’ll cause funds to dump those companies; exasperating the sell-off.

My Finances

With that said, here’s how I’ve adapted.

My finances really haven’t changed much. I’m spending more on groceries, especially right now as I am stocking up on certain goods. The added benefit of that is I’m spending less on food from restaurants, which saves me money and I’m eating healthier too.

So you’re spending more on groceries and less on take-out…what else? Well, given the nature of Covid and the uncertainty that surrounds it, my priorities have shifted a little.

More Cash

I’ve planned my clients’ portfolios with the above scenario in mind. The majority of clients aged 60 and up are positioned more conservatively than normal. With that in mind, all of the portfolios I manage will take a little hit, and my income will drop as a result.

I’ve suspended my retirement contributions, via payroll deduction, until I feel comfortable again. This may seem counterintuitive because of the stress I put on leaving things alone and dollar-cost-averaging as prices go lower.

Due to the fact that my income has some variability, not to mention my rental property and the uncertainty of my renters’ making rent payments (because of talks about forgiving rent payments for those affected by Covid), I have to keep more cash available than normal.

Retirement Contributions

As I mentioned, I stopped my automatic retirement contributions, but I am making voluntary contributions to my Roth IRA when I feel my cash available is adequate.

Other than that, nothing else has changed. Debt payments will continue as planned and saving for a down payment on a house will also continue.

Be advised: Any opinion expressed about the market/economy is strictly an opinion and should not be viewed as a certainty. Additionally, my preparations for said opinions are specific to me. Consult your financial professional about your particular situation.

Job Loss: What to do

May 13, 2020 by Jacob Sensiba Leave a Comment

Losing your job is like a big punch to the gut. At first, it’s hard to process, but then your head starts spinning. What will I do for work? How will I pay my bills and put food on the table? What will my family do?

Taking a deep breath is a good first step. After that, it’s time to put a plan into action. Many of you could be experiencing this right now, given what the world looks like today.

In this article, I’m going to lay out how to financially prepare before and in the midst of a job loss.

First thing

As I said, this will be a big shock to absorb. Give yourself some time to realize what has happened. More than likely, you’ll go through the 5 stages of grief.

Unemployment

One of the first things you should do is apply for unemployment. There might be some hoops that you have to jump through, but one imperative item you need to confirm with your old employer is that you were let go and without cause. Resigning or being fired for cause disqualifies you from collecting unemployment.

Set money aside for taxes. Unemployment does not withhold FICA taxes or state income tax (if applicable). If you normally receive a refund, you might get a reduced refund or none at all. Plan accordingly.

Severance

The next step has to do with severance. If you were let go or fired without cause, your company will, most likely, offer it to you. It isn’t required by law, but most companies do it. Take severance home and review it closely. Don’t sign right away. Once you’ve reviewed it, take it back and negotiate.

Job Search

Starting looking for a new job right away. It does not pay to wait. All jobs are first come first served, set get searching as soon as possible.

Be picky, but pick up a job of some sort that will provide you with some cash flow.

Is now the time for a career change? Have you been dissatisfied with your industry or line of work? Do you have the skills and/or qualifications to make such a change? These could be questions to consider.

Finances

With regard to any debts that you have outstanding, call your creditors and see if they will let you defer payments, or at least make reduced payments, for a while. Also, make the minimum on your debt payments. Having cash available for other necessary items is more important.

Relentlessly cut expenses and review your budget with fine-toothed comb. Again, cash flow is your friend in your new situation so the more liquidity you have the better.

Pad your emergency fund. Obviously, this is something that needs to be done before you lose your job, so it’s imperative that you listen. Common advice is to save 3-6 months’ worth of expenses. If you’re self-employed and are responsible for payroll and other business expenses, it’s prudent to have 6-12 months worth saved.

HELOC? That stands for Home Equity Line of Credit. Is that something you are able to do? Is that something that you want to do? A HELOC turns the equity you’ve accumulated on your home into a loan.

Insurance

Life and disability insurance are very important coverages to have, but a just loss and loss of income could derail those coverages. There is a rider that can be added (waiver of premium) at the time of application so your policy stays in force while you are unable to make payments. *Be advised: this has to be done when you sign up, not after the fact.*

Healthcare is another important item to take care of. First off, if you have any appointments you were waiting to schedule, do it now before your coverage changes. The next step is to find a suitable replacement for your current coverage. This could be taking your spouse’s insurance, finding new coverage on the marketplace, or signing up for COBRA.

Retirement

Avoid dipping into retirement savings – this should be your last resort. Retirement savings accrues most effectively when you leave it alone. That’s when compounding works the best. Not only that, withdrawing funds prematurely will subject you to income taxes and an early withdrawal penalty.

Do you have 401(k) loans? If the answer is yes, you’ll be required to pay that loan back in its entirety in the next 60 days, otherwise, it’ll be considered a withdrawal. Again, taxes and a penalty.

Make a decision on what to do with the old retirement plan – Do you roll it to your new employer, roll it to an IRA, or leave it with the current institution. If you have a lower account balance, your HR department could require you to transfer it or cash out. Each company is different.

Two Guys and Your Money #018: Top 5 Ways to Raise Your Emergency Fund Interest Rate

November 12, 2012 by Average Joe 2 Comments

Have shows come automatically to your iPod! Use the 2 Guys iTunes page here.

Listen to shows on your smartphone! Try the Stitcher app here.

Wow! This was a fun, fun, fun show (of course it’s filled with our usual surprises…..). BUT what we can tell you is that PK this week tells you the optimal time to rebalance your portfolio, Carrie Smith and Dominique Brown share their biggest financial gaffes, and OG & I save you some money in taxes on your mutual funds. Of course, we also give you our favorite ways to get a better interest rate on your emergency fund.

Sorry about the short post….I’m on my way back from San Antonio (I ran the marathon yesterday!).

Show Notes:

<Open>

Special thanks to Fidelity Investments for sponsoring our show! Check out TheFreeFinancialAdvisor/Fidelity to find out how Fidelity has been helping clients for over 60 years.

<> PK: Rebalancing

<> Let’s Give Something Away: How about a $25 Amazon Gift Card to help during the holidays? Check out our giveaway page after you listen to the show!

<> Shortwave: Carrie & Dom discuss their biggest financial mistakes.

<> Top 5 Ways to Raise Your Emergency Fund Interest Rate

<> End: Films OG – Wilfred Joe – Argo (both thumbs up!)

Enjoy!

Emergency Fund or Roth IRA?

February 1, 2012 by Average Joe 13 Comments

If you’re teetering on the edge of a trip down investing lane–but aren’t sure that you’re ready to begin locking money away–a Roth IRA just might be like two tickets to paradise. Pack your bags, we’ll leave tonight.

I just made that up. I know it sounds familiar. Deal with it.

Unlike its nasty cousin, the “For Retirement Only With a Couple Exceptions” Traditional IRA, a Roth has some attractive properties for people who need money in a safe place but are thinking “I’d like to start slipping some cash into a retirement account.” Two tickets to paradise.

Of course, this paradise has some weeds, but what do you want? I never promised you a rose garden.

Just made that up, too. I know…it’s a gift. Thank you.

Paradise Ticket #1: Emergency Fund

While it still makes absolute sense to have “need it right now” money outside of a Roth IRA, here’s the magical property that makes this shelter a fine second tier cash reserve emergency fund: you’re allowed to take principal back out whenever you want. If you remove funds contributed during the current year, it’s as if you’d never made a contribution in the first place. If it’s beyond the first year, you may take out up to the amount you’ve contributed.

That’s awesomesaucewithacherryontop because if you need money quickly, there’s no reason why you can’t access the cash you contributed.

Before you fight me on this, let’s work through it logically:

– When you make a Roth IRA contribution, do you receive any immediate tax benefit? No.

– How can the government penalize you for something that you received no benefit from? They can’t.

You want proof? Okay, here’s the IRS applicable document, Publication 590, Individual Retirement Arrangements. Check out the chart on page 63 and then the ordering rules on page 64.

More proof? At the bottom of the page I’ve included links to two less well written articles than mine. No charge.

When will you get into trouble? If you try and take any interest the account has earned, you’ll pay penalties to receive this interest unless it’s been in the account for five years and you’re 59 1/2 (whichever is later) OR qualify for one of the few exceptions to the penalty (you’ll still pay tax on the money when you withdraw it).

Paradise Ticket #2: Retirement

If you don’t end up needing the money, because your car didn’t break down, junior didn’t need to be bailed out of jail (again), and the dog stayed out of your neighbor’s trash bins for a change, this money can be used for retirement. At some point, once you’ve completely secured the reserve, you can switch these funds into more appropriate investments for retirement.

Ultimately, of course, this is what a Roth IRA should be used for: retirement savings. By easing into the Roth IRA plan, you’ll build the account early so there’s plenty of money available when you’re ready to begin in earnest.

Like Steve McQueen you’ll have a fast Roth IRA machine and they’ll never catch you tonight.

The Downside

Oh, yeah, you weren’t thinking about having a Roth IRA as your only emergency fund, were you? A Roth IRA is, to put it bluntly, an absolutely rotten place for a first tier reserve.

Here’s just a sample of our problem:

– Remember when I said you can get money in a hurry? It’s not like the payday loan shop down the street or Louie on the corner. If your money is at an institution close by (like a neighborhood bank), you can probably take out funds now. If not, you’ll either have to wait for money to be transferred to a non-IRA account or until they can mail you a check. That’s not instant money. It’s “we’re going on an emergency trip to visit ailing Grandma in her cottage in the woods, and I paid for it with my credit card but don’t want to pay interest on the charge” money.

– If you take out all of your principal, you’ll only have some interest in the account. This money MUST stay in a Roth IRA for five years or until 59 1/2, which ever is later (as mentioned above). To take it out early, you’ll pay an IRS penalty. Although this may be a negligible amount on a small interest amount, it’ll make your tax return more complicated.

For these two reasons, I wouldn’t start a Roth IRA as your main emergency fund. Instead, only use it as second tier money.

What Type of Investment Should I Use, Joe?

It’s your cash reserve, silly. We don’t want to use anything that fluctuates at all. I know interest rates are poor, but if you’re only beginning, you’ll need the highest paying account the bank will allow while still keeping your money safe.

Don’t lock up the funds in a CD or you won’t be able to access the money, ruining why you used this strategy in the first place. It has to be a liquid account, like a savings account.

Once you have enough, transfer your money to a higher paying money market. Often this is between $500 and $2,000.

As soon as your cash reserve emergency fund is full, begin saving money into real retirement accounts that match your long term goals. Use a 401k for tax advantages today. Open a 529 plan for your children’s college.

Before long you’ll have so much cash they’ll be lining down the block just to watch what you’ve got.

So delicious.

How to Get Money In There Without Stealing It

The only way you’ll successfully save money is if you leave it outside of those pockets of yours. You know the ones. The I-can’t-hold-cash-for-longer-than-a-couple-minutes-without-spending-it pockets. Instead, make saving a bill.

Better yet, make it an automatic payment bill.

By setting up an automatic payment into your account you won’t have to remember to fund your account. Instead, money will flow directly from a checking or savings account into the Roth IRA, building it while you focus on other areas.

If possible, set up a separate direct deposit into your first tier reserve at your bank and then an automatic payment from the first tier reserve directly into the Roth IRA reserve account. That way, you’ll never have the money in your hot little hands.

If you want money in your hands AND to make Roth IRA contributions systematically, it’s going to be much harder, and there’s a good chance you’ll fail.

You can’t always get what you want. But if you set up an automatic payment plan you just might get what you need.

A Good Strategy

Once you’ve achieved your first tier reserve ($1,000 fast if you’re a fan of the bald dude on the radio, or other similar “quick cash” amount), split your automatic investment between your first tier reserve and a Roth IRA. This will help you ease into the investment world without the fear that the money is untouchable.

I’ve used this plan with nervous beginners to help calm them into rolling toward doing the right move: investing in their 401k where the money IS untouchable. It’s a good way to ease your mind.

…and before you know it you’ll be on your way to a million dollars. Then you could buy yourself a green dress.

But not a real green dress; that’s cruel.

No, I can’t stop.

Other Documents That Totally Agree With Me:

The Motley Fool: All About IRAs

My Money Blog: Can I Really Withdraw My Roth IRA Contributions at Any Time Without Tax or Penalty?