Category Archives: Budget

How Do You Budget Money for Emergencies?

My fiancée was blow drying her hair the other day when it suddenly shut off. My frantic fiancée – her hair was only halfway dry, which, apparently, can lead to frizziness if allowed to air dry at that point – ran to find me. At first, we thought it might have just been a short circuit, but the thing wouldn’t turn on after I checked the circuit breaker. It wouldn’t turn on after she moved it to another outlet, either. It was busted.

I Googled the price of a new hair dryer on Amazon and the price range was enormous. There were hair dryers for $15, hair dryers for $50, even hair dryers for $200 or more (really? Who needs a $200 hair dryer?). I was so overwhelmed by the number of choices that I basically gave up, deciding my fiancée’s hair would have to fend for itself.

But it did get me thinking – how do you plan for emergencies when it comes to budgeting? Do you factor it into your household budget? Do you set aside money for emergencies – or do you simply pull cash out of your emergency fund when things go awry?

Building Your Emergency Fund

We’re going back to Personal Finance 101 here: the basics of building up your emergency fund. The old rule of thumb said you should have money for three to six months’ worth of expenses in your emergency fund. Since the financial crisis and the sky-high unemployment we’ve seen over the past four years, that advice has changed. Now, financial planners suggest you build up your emergency fund for at least six months’ worth of expenses; some urge you to save up to 12 months’ worth.

Emergency Fund vs. Slush Fund

I have some friends who have, essentially, two emergency funds. The first is the traditional emergency fund I just described – the one you don’t touch except for major emergencies, like a sickness or injury that knocks you out of work for a few months, or a job loss. Their second emergency fund is more of a slush or rainy day fund. They don’t contribute to it religiously; rather, they put in a little bit here, a little bit there, whenever they have the extra cash to do so. Their theory is that this is the account from which they’ll withdraw cash should they need to, say, buy a new hair dryer.

I don’t adhere to the double-emergency fund mindset. It’s one thing to have a year’s worth of expenses locked up in your main emergency fund; setting aside additional money in a secondary emergency fund (slush fund, rainy day fund, whatever) seems pointless. After all, if the money is in a savings account, it’s earning next to nothing in the bank; you could invest it in your 401(k), use it to pay down your debt, make extra mortgage payments with it, etc, where it would actually make money for you.

Budgeting for Small Emergencies

Around here, money for small emergencies – like that hair dryer – come directly out of our monthly budget. After all, replacing something that cost $20 is hardly an emergency – especially if it’s not a necessity. (Note: Please don’t tell my fiancée that I don’t think her broken hair dryer is an emergency. We’re too close to the wedding to call it off.)

When we have one of these minor emergencies around here, we simply dip into our checking account to pay for it. If, for whatever reason, it’s a tight month financially and we don’t really have extra money for emergencies, we’ll trim back in other ways – maybe skipping a dinner out or being more conscious about our energy consumption. We find ways to balance it out, so that by month’s end, we hardly notice the difference.

Budgeting for Big Emergencies

If a broken hair dryer is an emergency, then finding out you need a whole new set of radial tires on the eve of rainy season is a catastrophe of apocalyptic proportions. To me, this is what an emergency fund is truly for. Replacing tires can run close to $1,000, depending on the make and model of your vehicle as well as the type of tires you’re buying. Even if you go with a cheaper tire, you’re still looking at $500 even if you buy and install them through a discount retailer.

In situations like that, I treat my emergency fund like a no-interest credit card. Say I have $10,000 in that fund, and need $1,000 to buy tires, or a new water heater… or a really high-end hair dryer (sense the sarcasm?). Instead of putting the $1,000 on an actual credit card – where I’d have a single month to pay it off in full before incurring interest – I take the money for emergencies out of my emergency fund. Now, I only have to worry about paying myself back. Since I won’t have to deal with interest, I can add a couple hundred bucks to the fund every month until I’ve completely replenished it.

Readers, how do you budget for emergencies? How does your plan differ for big emergencies vs. small ones?

All Work And No Play Makes Budgeting Miserable

It’s arguably the most famous quote from one of America’s most popular horror movies. “All work and no play makes Jack a dull boy,” uttered Jack Nicholson’s character, Jack Torrance, in the 1980 thriller “The Shining.”

Turns out, all work and no play makes me a very dull person, too.

I’m not talking about the writing process – which slowly drove Nicholson’s character insane – but the budgeting process. Years of meticulously tracking, recording and weighing the use of every dime earned, budgeting can start to feel like monotonous, tedious work. “A penny saved is a penny earned,” goes one of Benjamin Franklin’s oft-quoted epigrams, published in Poor Richard’s Almanack. But save too many of those pennies, and you’re liable to follow Jack Torrance’s lead and go crazy.

Saving Money Is Hard Work

If you’re a hard-core money manager, you know that living on a budget is hard work. It means allocating the funds for your day to day needs, weighing the pros and cons of potential budget busters and preparing for potential financial disasters. No matter how you track your spending, you know keeping tabs on your daily, monthly and yearly expenses requires restraint and foresight, with the ability to prioritize your needs over your wants.

The Budgeting “Needs”

The first step in setting up a budget on which you can live – successfully – in the long-term is to separate your “must haves” from your “like to haves.” The items that fall into this category vary from person to person. My friend, Michelle, swears by her iPhone with unlimited monthly data plan; her boyfriend thinks it’s unnecessary, sticking to a base service plan – just talk, no texting or Internet – on his antique of a cell phone. My basic list of “needs” includes:

  • Shelter – Depending on your situation, this could be rent or a mortgage payment. No, a second mortgage on a vacation home in the Maldives does not count.
  • Food – As in your grocery bills, not your Starbucks habit or penchant for a bottle of wine at dinner.
  • Utilities – We’re talking electricity bills, heating bills, water bills. Some of you might consider Internet costs, cable service, and cell phone plans a necessity too.
  • Transportation – This could be gas, loan payments, and maintenance on your car; or, if you’re a city dweller, it may mean a monthly budget for public transportation or parking costs.
  • Insurance – Be it home insurance, car insurance, or medical insurance, these premiums can seem unnecessary, especially if you never find yourself needing the services they cover. Trust me, they need to be a priority.

I’d make one very important addition to this list of basic “needs”: building your emergency fund and investment portfolio. It’s standard protocol to build your emergency fund to cover at least six months of your basic expenses – the items outlined above. It’s also standard to sock away ten percent of your income for retirement – a concept akin to tithing yourself- but that assumes you started saving early and plan to retire after Social Security kicks in. Wait until you’re 35 to start building your retirement fund and you’ll have to save nearly a quarter of your income if you want to retire at 65. Saving for the future shouldn’t be a want – it’s a need.

The Budgeting “Wants”

There’s an old personal finance adage that you shouldn’t spend more than one percent of a windfall on splurges. But what about budgeting for your every day splurges – the things that make life a little more enjoyable? Part of budgeting includes learning how to have fun with money.

This is where the “all work and no play” rule comes in. If your family’s budget only allows for the “needs” – with flexibility for building your investment portfolio – you’re liable to snap. Take a lesson from my friend, Jameson, who vowed to save every bit of discretionary income for a period of three years. Two years in, he’d squirreled away nearly $60,000… which he subsequently blew on a Porsche. Did I mention Jameson lives in upstate New York, where the snow and ice preclude him from driving the Porsche nine months out of the year?

Budgeting In Some Wiggle Room

Liz Weston from MSN Money suggests budgeting for your wants, allowing you to be both fun and frugal. According to her formula, half of your post-tax income should go to pay for your needs– she puts investments, debt repayment and savings into another column, garnering 20 percent of your adjusted income.

That extra 30 percent? Liz suggests having a little fun with it, and I agree: although 30 percent of your adjusted income might be a little high. After all, if you’re earning $51,000 a year – the median household income from 2006-2010 – you’re bringing home nearly $37,000 after taxes; you don’t really need to put a full $12,000 of that toward your “fun money” fund.

Slash that number in half – 15 percent of your adjusted gross income, or, for the average American household, roughly $6,000 a year – and you’ve got a more realistic number. What could you do with $6,000 in discretionary income every year?

Probably more than you think.

Do you include wiggle room in the budgeting process? How much do “fun money” do you allot on a monthly basis?

The Legend of the Job Creators

This is a post written by Avishai Shuter, and up-and-coming zoologist who lives in his parents house while trying to get a job with the Bronx Zoo.

I’m sure by now you’ve all heard about the class-warfare initiated by your friendly neighborhood super billionaire, Warren Buffett. Buffet has called on the government to start taxing him and his mega-rich friends a bit more in an attempt to make some sort of dent in the national deficit, which as you all know has reached see how much we could get for the Statue of Liberty in a yard sale levels.

The Republican Issue and Response

The issue, Republicans (aka FOX News) claim, is that if we start increasing taxes on millionaires of the country, we are in actuality taking money out of the pockets of job creators. Conservatives are apparently of the position that if the rich are taxed by even a fraction more, they will cease to create jobs for all the peasants depending on them for sustenance.

Wait, what? Warren Buffett even addressed this in his open letter. I’ve heard TV personalities argue this point by saying that the job creators, in actuality, often downsize in an attempt to increase profits. But this line of thought skips over a fairly obvious problem with the Legend of the Job Creators (movie rights still for sale).

The Rich Don’t Create Jobs

If you work for Apple, it doesn’t matter how much money Steve Jobs has. Your salary isn’t coming out of his pocket. The mega-rich often make their money by being in charge of companies (as well as personal investing of the money they’ve made), while the opposite is much more unusual. They’re on the company payroll as much as anyone else.

Now, I’m not denying that the mega-rich create some jobs (I’m sure Bill Gates has a small army of cleaning ladies sweeping his massive house. Hell, he could probably pay the US Army to do it), but I would be very interested to see what percentage of Americans are directly employed by these millionaires and multi-millionaires. My guess is not really enough to qualify them as Job Creators. For that matter, how many jobs does one have to create in order earn that title? How many families employ full-time housekeepers or gardeners?

Are they job creators? Do they qualify for massive tax breaks?

Additionally, as many have pointed out recently, the wealth of the top 1% of the country roughly equals the wealth of the bottom 50%. Now, while the net worth of the two groups may be the same, their effects on the economy are staggeringly different.

This is another obvious, though overlooked, fact. The larger group of people is going to have a larger affect on the economy as a whole (and subsequently on jobs) than the small, very wealthy, group. McDonald’s doesn’t make money because rich people buy their food, they make money because a lot of people buy their food.

The point I’m trying to make is that we don’t live and work within an economic system based on serving the rich. It’s OK for people to become very wealthy, and they shouldn’t suffer for it (although compared to the disappearing middle class, I can hardly call increased taxes on billionaires suffering).

But our economic system doesn’t, and shouldn’t, revolve around millionaires and billionaires. I’m not quite sure why conservatives are so adamant about turning less wealthy Americans into serfs, and I don’t see the reason for it. The top 2% aren’t separate from the economy, they’re part of it as much as anyone else.