An Eye to the Future: Emergency Funds, Retirement and Estate Planning

I realize that some of my readers are out there looking at me with a quizzical brow wondering why I would choose to write a post that includes estate planning tips when my main demographic is folks under 30. Let me promise you that this information is worth your time.

It can be easy when you are in your teens, twenties and thirties to trick yourself into thinking that you will live forever, but the truth is that you will not. You have no idea what the future holds! While this may be a scary thought, it is not intended to be. In fact, by talking about emergency funds, retirement savings and aspects of estate planning we are actually doing something to control that fear and maybe even find joy in what the future might hold for us and those we love. Here are some tips to help you think ahead:

  • Emergency Funds: An emergency fund is money set aside for use in emergencies, generally 3-6 months worth of income. I cannot over stress the importance of building up and maintaining this fund, even if you can only contribute $20/month right now. This fund comes in handy when you have unexpected expenses such as car repairs, home repairs, medical costs or job loss. I recently got hail damage on my car and I couldn’t be more grateful that I could draw money from this fund and not rack up a credit card bill. Check out this post for tips for creating an emergency fund. Even if you can only start small, it is worth it to start saving now.
  • Retirement Savings: For many of you, retirement might seem like it is a long ways off. You may have decided to defer saving for retirement until you have a better job, are making more money, have kids, etc. But, you really can’t afford to put it off. By the time that you get around to it, it may be too late. With the magic of compound interest, beginning to save at age 22 versus waiting until you are 35 can make a big difference. Check out this article for tips on why it is important to start saving now. Again, contributing a small amount now towards your retirement can really add up.
  • Estate Planning: There are many different aspects to planning for your estate. I will explore a few.
  1. Will: According to RocketLawyer’s 2011 poll, 60% of Americans admitted that they didn’t have a will. Nearly everyone under 30 that took the pool, 92%, said that they didn’t have a will. If you are over 18, it is not too early for you to be thinking about making a will. Check out this business insider article for more information on why it is important to create a will. What many people do not understand is that if you do not make a will the state will decide how your property will be distributed. While you may think that you do not have “property” because you may not own a home yet or have children, you probably have a bank account, savings account, jewelry, car or even some investments. Your will is also a great time to think about charitable causes that you might want to leave money or property to in your estate. A will ensures that your assets are distributed to those you choose in the manner that you choose. You can create a will with a lawyer or online for under $100. If you decide to do this online, be sure to do your research.
  2. Living Will: While you are thinking about your estate, it is also important to create a living will, also known as a health care directive or physician’s directive. This document informs your family and health care providers about your desires for prolonging medical treatment in the event that you are not able to speak for yourself. The regulations for this vary by state, so it is good to have a lawyer assist you with this. Many estate planning lawyers will include living wills and durable power of attorney in your package of estate planning documents. You may also be able to fill out this form online, be sure to thoroughly research the site before you use it. For more information on living wills check out this all law article.
  3. Durable Power of Attorney: While you are working on those other two estate planning documents, you will probably want to also create a durable power of attorney. This is a legal document that gives someone the power to act in your place if you become incapacitated, particularly in matters financial and medical.

I realize that this information can be really overwhelming and somewhat depressing. But, it is incredibly important! While we can never have complete control over our future, by saving money and planning our estate we can know that our wishes will be respected and our future will be more secure.

Join the Conversation: How are you thinking ahead and preparing for your future?

Importance of Saving Now

We’ve all heard the mantra that you need to save your money. But, why is saving so important especially when you already have a tight budget? What do you need to save for?

It is important to start saving now so that you have enough money for an emergency fund. An emergency fund is a fund that you can draw upon if you lose your job, need to buy a new car, or another unexpected expense comes up. The general rule is to have 6 months salary/living expenses saved up and this can take a long time to accrue, especially if you are in school. Start with a goal of saving one month’s living expenses and slowly increase it to two, three, and eventually six months.

It is also important to begin saving for retirement now. You may be thinking, “Really, I need to start thinking about retirement now?” Yes! Putting away even just a little bit now, can really add up because of compound interest. Oblivious Investor provides the following table:

“The following table shows the inflation-adjusted wealth an investor would accumulate by age 65 if she invested $5,000 per year (starting at either age 22 or 35) and earned real returns of 3-5% per year.

Assumed Real Return

Starting at Age 22

Waiting Until Age 35

3%

$458,599

$257,514

4%

$600,147

$308,507

5%

$793,501

$371,494

So, yes, there’s still a large benefit to starting early. In fact, one could argue that low return expectations make it even more important to start early.”

Wonder how compound interest works? Check out this video by commoncraft.

You may be thinking: “Grace, this is all well and good. But where do I find this money to save?” It’s simple. Pay yourself first. Instead of saving whatever money you have left at the end of the month, take some money right off the top of your paycheck and save it. Most banks and credit unions feature an automatic transfer so you can transfer money from your checking to your savings every month without even thinking about it. Chances are you won’t even know it is gone. When I was in school, I started by just saving $25/month and it definitely added up over the course of the year. The more you save, the more you invest in your future.

Creating An Emergency Fund

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When you are a student living paycheck to paycheck it can be hard to think about creating an emergency fund. However, it is just as important now as it will be in the future. Leo Babauta in his blog Zenhabits wrote a fantastic article on creating an emergency fund no matter how tight your budget is.

Excerpt from 21 Strategies for Creating an Emergency Fund, and Why It’s Critical

  1. Start small. If you don’t have much to save, it doesn’t matter — the important thing is just to start. Even if it’s only $25 per paycheck, just start. It will slowly grow each paycheck, and you will be glad to see at least a little in your savings, and will soon be motivate to try to save more.
  2. Automatic deduction. This is common advice, but that’s because it works. Set up an online savings account (such as ING Direct or Emigrant Direct) and have it automatically deduct an amount each payday. If you don’t have to think about it, saving will be much easier.
  3. Payroll deduction. If you have discipline problems, there are accounts where you can have the amount deducted directly from your paycheck, before it’s deposited into your checking account (or before your employer cuts the paycheck).
  4. Treat it as a bill. Every payday, you have a list of bills to pay before you can spend any of your money on variable expenses such as gas, groceries or eating out. Well, add your emergency fund contribution to your list of bills, and pay it at the same time. This makes it non-negotiable, and then what’s left over is what you can spend on other stuff.
  5. Reduce an expense, save it. Take a look at how you’re spending money now, and find some things that can be cut back. Magazine purchases, gourmet coffee, comic books, cable TV, gizmos and gadgets. Whatever you decide to cut back on, take that same amount and put it directly into savings each paycheck. Don’t spend it.
  6. Round up. I got this tip from J.D. Roth of Get Rich Slowly … actually, it’s a strategy used by his wife, who will log every purchase or check she writes into her checkbook or finance software — but rounds up to the nearest dollar. So if she spends $26.01, she enters it as $27. Over the course of a month, this can add up to decent savings.
  7. Double purpose account. This tip is from Trent of The Simple Dollar, who wanted to pay down his debts but still have the financial security of an emergency fund at the same time. So Trent brilliantly used a double-purpose account: he would save money in an account, and after he reached a certain minimum, anything above that amount was being saved to pay off a specific debt. So let’s say the minimum amount is $500. After you pass $500, the money being saved is for a $200 debt (for example). Once you reach $700 in your savings account, you can pay off the $200 debt completely. Repeat the process for each debt.
  8. Tip yourself. If you go to a restaurant and tip a waiter 15 or 20 percent, for example, match that tip for yourself. So if your tip is $10, tip yourself $10 as well … and put that directly in savings.
  9. Keep paying debt, but to yourself. If you finish making a car payment, or paying off a credit card or smaller debt, take the amount you were paying to that debt and put it directly in savings each month. You won’t feel a difference in your budget.
  10. Budget big for groceries, then save the difference. Let’s say you normally spend between $320 and $375 on groceries. Budget $400 for groceries, and whatever you don’t spend of that $400, put it in savings.
  11. Quit smoking or drinking. Well, I wouldn’t bet my emergency fund on quitting one of these two addictions, but if you do quit, you should take the amount you were spending (and that’s a considerable amount, I know) and put it into savings. For me, I spent more than $5 a day on smoking — and when I quit in November 2005, it freed up $150 a month for savings.
  12. Limit your access. If you are tempted to spend your savings, you should put it in an account that is hard to get to. Put your savings in a money market account or fund, and when it reaches a certain amount, roll it over into a CD or Treasury bond. You might not make as much on a CD, for example, but the point is that it’s hard to access and requires less discipline.
  13. Stash a bonus or tax refund. If you get a Christmas bonus, or a tax refund, or some other such windfall, put that directly in the bank and don’t spend it. Use it for your emergency fund. Now start paying off your debt.
  14. Save your change. Don’t spend any coins you get. When you get home at the end of the day, empty out your pockets into a jar, and once a month, go to the bank and put it into savings. This can add up faster than you think.
  15. Save dollar bills. Similar to the above strategy, get your cash in $20 bills, or $10s or $5s. Don’t carry $1 bills. When you get $1 bills as change, don’t spend them. When you get home, put those $1 bills in an envelope, and save them.
  16. Refinance. Refinancing your mortgage or auto loan can save you a lot of money. Take the amount you save and put it in savings.
  17. Sell your car. If you have two cars, see if you can live without one of them. That’s what my wife and I do, and it works out fine, even with six kids. Take the amount you were paying on the second car and save it. Or, alternatively, sell your car and buy a cheaper used model. Save the difference in the payments.
  18. Cut out dessert. If you’re trying to lose weight, don’t order the dessert or junk food you would normally order. Instead, put the amount you would have spent in an envelope and save it.
  19. Stay in. Instead of going to the movies or eating out, cook your own meals and watch a DVD — or do something fun for free. Save the difference.
  20. Freelance. Take your skills and market them as a freelancer, or get a second job on the side. Take the extra income and bank it. This was one of my strategies, and it works great.
  21. Save on auto insurance. If you can switch to liability insurance, you might be able to save hundreds of dollars. Take the extra amount you would have paid for insurance and save it.

Join the Conversation: What advice do you have for someone beginning to create an emergency fund?

BUDGETING 101: Creating A Budget

This is the first in a two part series on creating and maintaining a budget.

1. Evaluate Your Cash Flow:

  • Track Your Income: The first step in creating a budget is tracking all of your different forms of income including: scholarships/fellowships, loans and work payment.
  • Track Your Expenses/Spending: The second step is tracking your expenses, make sure to include your priority expenses (housing payments, bills, groceries, etc.) as well as your discretionary spending. You can do this in a variety of ways:
    • Worksheet Method: Some people still enjoy putting pen to paper, if that is you check out this worksheet.
    • Excel Spreadsheet: Microsoft provides a variety of personal budgeting templates.
    • Budgeting Software: There are a variety of different programs out there, one of the most popular is Quicken.
    • Online Site: Again, there are a variety of sites. I use Mint.com because it syncs with my bank account, categorizes my transactions and tracks my budgets all in one place.
  • The Bottom Line: Subtract your expenses from your income to see how you are doing. Is the number positive or negative? If your number is negative, you are spending more than you are earning. The goal of budgeting is to create a plan to spend less than you earn. If your number is positive that’s good but it’s not the end of the conversation. It’s important to make sure that you are maximizing your assets and planning for the future.
  • Aligning Your Spending with Your Priorities: Evaluate your spending and make sure that your spending reflects your personal values and priorities. Is your money going to the places and people that matter most to you? Are you taking care of your needs before you are taking care of your wants? What are some doable trade-offs that you can make?

2. Create Your Budget: Use your tracked expenses to create your budget categories, be as specific as you like. Make sure that you account for both your priority expenses and your discretionary spending. Be realistic with your expectations and make sure that you don’t forget to:

  • Prepare for the Unexpected: Do you have an emergency fund to draw on if you lose your job or incur unexpected expenses (car repairs, medical bills, etc.)?
  • Plan for the Future: Do you have a savings account that you regularly contribute to? Even a small amount (such as $25) every month can add up. Are you investing in your retirement? Are you saving up for a large purchase (computer, car, house, etc.)? If you have student loans, could you pay off the interest now?
  • Save for Occasional Expenses: Do you have a way to pay for occasional expenses? Make sure that you take into account how you will pay for Christmas and Birthday gifts, travel for the holidays and other occasional expenses so that these expenses don’t break the bank.
  • Problem Areas: As you tracked your spending did you find any problem areas? If so, gently challenge yourself to be more frugal in those areas. Remember to start out slow, it takes a long time to change a bad habit.
  • Have Fun: Where is your discretionary spending? Many people when they are first budgeting forget to give themselves some room to have fun. While it is important to be frugal and align your spending with your values, it is important to have some space in your budget for the fun stuff.
  • Be Flexible: It can be difficult to precisely predict your spending, especially if this is your first budget, so be flexible. If you have to switch some things around to better fit you, that’s fine!

Join the conversation. If you appreciated this post, consider “liking” this post in the “leave a comment” section. Or, join the conversation by leaving a comment: How do you budget? What are some strategies that you use?