Money Obedience

We all know that we need to save for some unforeseen emergencies like health expenses or unemployment, but we are often lost about the amount we need to save. So, how much should we save? As with so many things in personal finance, there is not one number that fits all. As a matter of fact, there is not even an exact amount anyone can calculate for him- or herself. Often, the best we can do is to find a range for which we might aim.

One useful rule of thumb is that you put away between 3 and 6 months of your monthly household expenses for emergencies. This is a pretty wide range. Actually, most of us are saving at that range already, without even knowing the rule.

Still unsure of which end of the range to aim for? You can narrow down your target a little depending on your personal circumstances. For example, find the answers to the following questions. Is there only one breadwinner in the family? How many kids are in the family? How old are the children? How secure is your income? Answers to these and similar questions will let you know how vulnerable you are to losses in income – and the more vulnerable you are, the more you may want to aim higher (or for a greater number of months of replacement income).

There are other rules out there that people think are useful here. Some say that we should set aside at least $1000 for emergencies. That seems like an odd number to me. What good can $1000 do? You will not be able to financially survive a real emergency like high hospital bills or long term unemployment on that figure. At least I know that $1000 would not make much difference to me – but I am one to always prepare for the worst-case scenario, and my worst-case scenario comes with a much higher price tag. Still, $1000 is better than nothing. If you’re at the $1000 with your rainy-day fund, it is a great start as a down payment for a larger future emergency fund.

Yet another idea is to add one month’s expenses to your emergency fund for each 1% increase in the unemployment rate. That way, if unemployment is high, you save more, on the assumption that you are more likely to dip into your savings if you lose your job because it will be more difficult to find another one. This sounds like a pretty good idea, generally speaking. But what if you’re one of the first ones facing job losses when the economy has a downturn? You wouldn’t have enough time to respond to the up-tick in unemployment rates because you’re one of the folks contributing to that up-tick! Thus, there’s no way this strategy can work for everyone. You’d have to be one of the lucky ones who kept his/her job when things got dicey in the labor market. And in the current environment you would have to save pretty aggressively to keep up with the quickly rising unemployment rate.

Even though there is not one single correct solution to this problem one thing remains the same. Emergency savings are meant for, well, emergencies. You cannot know what type of emergency will strike, or when it will occur, which is why you must be prepared. Being prepared surely worked for me. I have less than 9 times of monthly expenses in my emergency fund, but it helped to have that much, because I lost my job and had no time to respond to the increased unemployment rate because I was one of the statistics, as they say. And now I am working for less income than I did before, which does not allow me to boost my emergency fund aggressively to keep up with the still-rising unemployment rate. But this does not matter, since I was prepared before a financial emergency hit me. And that is really what it boils down to. There’s no “one size fits all” here. You just need to be prepared for financial emergencies in a way that works for you individually. Be sure to think about it before the emergency strikes!

We all know that the current economic crisis is hitting every pocket in the economy. There is nowhere to hide. For example, we were shocked about the take-over of Wyeth where one of our friends works in the research lab. He is super-smart and holds a PhD in chemistry. Yet, his job may very well be eliminated within a year, and this will have dire consequences for his family. Of course, they depend on the income from his job for their economic well being.

So, this morning Hubby asked me if my profession feels the downturn – I guess he presumed that because college professors are on multi-year contracts, they don’t. Well, class sizes have gone up and so will tuition. Conference travel has been cut significantly and international travel is disallowed. Our already meager office supply budgets are being cut again. Recently, I was promised cash remuneration for doing some service work, and the whole thing was just “renegotiated” – without my input! That is, I was told “Thank you very much for the service,” but told that I can have goods instead of cash. If I need to get a new keyboard, I guess that’s where I can get it from, but I’d rather have the $300 I earned, in cash, thank you very much.

So, we do all we can to improve our home life, since work life in this kind of economy requires greater and greater sacrifices (like working harder and receiving less, that is if you’re lucky enough to hold onto you job). If I look at it this way, there are actually some good news about the crunch. Like my baking. Since we’ve become a gluten-free household, and gluten-free store bought stuff is (1) expensive in the extreme and (2) cardboard-like in flavor and texture, I’m doing an awful lot of my own baking. That’s been well received in the household, especially by the kids. I learned that even the baby loves brownies (a shocker to me because I don’t even like chocolate!). My kids are so content with what they have it makes me proud, and they’re even elated when family and friends send over hand-me-downs. (Daily, my three year old specifically asks for his “Merrick” shoes, the cool shoes his cousin gave him.) And I’m happy to put on our kitchen bulletin board the pretty pictures the kids paint for me on the white backs of the “mistakes” that come out of my printer.

Still, some discomfort remains. Hubby and I talk often about how the crisis is affecting people on the brink – and we well know so many who are struggling today when they were on top of the world six months ago. I shudder to think of how those living (or as Kevin Bales says “slowly dying”) on a dollar a day are doing. It is easy to forget these very poor people of the world when you are concerned about your own immediate economic prospects. They are still out there and struggling more than ever.

As I think more on these issues, if anything that brings relief to my overtaxed brain comes up, I’ll surely let you all know about it. One thing is likely though. The economic crisis will make us refocus on what life is all about – living, and not chasing more and more dollars. I’ll be glad to hear comments on how you’re all making it work.

New Year’s Eve is my favorite day. It’s not because I’m big into resolutions – eventually, I break ‘em all anyway. (Same with vilkri-he.) Still, I love the day because it’s a symbol of renewal for me. I can say goodbye to the past, which means looking back at all the blessings I enjoyed and the triumphs I overcame, and I can look forward to the future, which means being hopeful about enduring and even overcoming whatever challenges come my way and optimistic about facing new joys to come.

What does this have to do with personal finance? I will get to it – and before I’m done, I’ll explain why I’m breaking one of Suze Orman’s cardinal rules, and I’m happy to do it. Indulge me while I relate a very personal story.

My husband and I, when we married, were at very unequal levels of income – his was far greater than mine. We bandied about with what we’d do about money when we got married. Ultimately settled on Suze’s rule that couples should keep their accounts and incomes separate and pay bills according to each one’s contribution to the household income. That is, if you make 50% of the income you pay 50% of the bills, but if you bring in 20% of the income you pay 20%. We tried that for a while. But two things changed that.

Just last week, my doctor detected a problem with my thyroid that cannot be uncovered with the normal thyroid tests, so I’m on my way to seeing a specialist. Maybe I’m on my way to getting it fixed! But you should know that some symptoms of this hypothyroid condition are memory loss and depression. I digress, but I say all this to tell you that long ago I balanced my checkbook daily (!) with pencil and paper (!) and knew where every single penny of my money went. But later in life, as I struggled with health issues, I didn’t have the stamina or memory for it. vilkri-he took over opening my mail pretty early in the marriage. It made me pretty uncomfortable at first, and I still feel quite guilty about it, but it got the bills paid on time. He does all the bill paying for us now.

The other thing is that changed is that vilkri-he lost his job in November ‘08. So now, I’m the sole breadwinner. I already wrote about this kind of freaking me out, but life is what it is. Thankfully, I got a new job and my income isn’t as low as it was when we first got together. But we long ago decided to merge our accounts. So we are no longer following Suze’s rule. Hey, there’s not enough cash flowing through our household to make a bunch of accounts worthwhile, anyway!

I tell you all this to the New Year to say that we’re beginning our 2009 in what seems to me to be an extraordinarily happy place. Ironic, no? We have one income in the house, and I still don’t open the mail. But I have a husband who did these things even when we were both fully employed – he took his “leisure” time to take over the home finances when I was not in a position to do it. And now, I can make a big contribution to the household when I didn’t think five years ago that would’ve been possible. What might seem to others to be the hardest of times, at least financially, is one of the happiest times to me.

I say this to you to tell you that if you are going to resolve something for the coming year, can I make a suggestion? I would ask you to resolve to ask for or accept help if you need it. I spent most of my life trying to succeed, be SuperWoman, or whatever you want to call it. And it took me many years to realize that I sometimes need help. And I’m so grateful to have it (and in the form of a very supportive husband). Indeed, if I have a resolution this year, it is to lessen my stress even more, if I can do it.

So, if you can use a little help this year, take it. Consolidate your bills, ask your family to accept your cutting back on gift giving to ease your debt burden, seek out debt counseling, or call your lenders to negotiate for better terms. Of course, you can always subscribe to vilkri to get some help there including a free budget planner. Hubby and I will even get help ourselves with vilkri.com! We’ve decided to make the site snazzier. Look for changes in the coming year, which I trust will be a spectacular one for all of us, even with such a bad economy looming. Happy New Year everyone!

My wife does not like it when I talk about the worst case scenario. Especially in the case of our finances. It makes me say things like, “Honey, we might have to consider selling our house.” That would not make me happy at all, but I can’t help think about it now and then especially in the face of worsening economic news .

You should know that we both love our house. It’s had additions since then, but part of the house was built in the 1850s. We were told that it was once a mill, and it was powered by a brook that runs along the back of the house. (I’m sure the brook was more powerful than it is now, and I was told by a neighbor that it used to have fish!) It is really nice to sleep with the window open and to hear the water bubbling down. In a later life, the original mill was expanded and became a chair factory, before it was adapted and expanded yet again to turn it into a suburban residence.

When we moved in we had to do some major renovations. Even though the house was in a live-in condition, the kitchen and the master bathroom must have been neglected for 40, maybe 50 years. I suppose the reason for this neglect was that renovating a kitchen and a bathroom are not only messy affairs but are also very expensive. Well, we decided to spend the time and money. I am glad we did. We are now happier than ever in this house.

The downside of this renovation is that we still have a mortgage on our house that we pay off monthly – just as any other family in our situation would. And we financed some of the renovation with a home equity line of credit which we also pay off now.

Well, back to the worst-case scenario. Needless to say, we need regular injections of cash to make our household stay afloat. Since I am out of work now, I will have to find another source of income like another job or a business that generates a profit. We are not in a situation that allows me to retire, nor am I ready for such a step. So, I will have to start making money again at some point. We’re just not in a situation where we can comfortably live on my wife’s salary alone.

The good news is that my wife makes enough money on her own to feed a large family, even if it can’t cover all of our current expenses. Also, her job is pretty secure. So, we would probably be able to survive well enough – at least for a while. And yes, maybe we do have to think about selling. If we have to, we might not live in a house as great as ours is now, but we will probably always have a roof over our heads and food on our table. So many people don’t have that, so I don’t take it for granted at all. Having food and shelter would be ok by me and I am sure my wife agrees.

Thinking about the worst case scenario stresses my wife out, but it comes naturally to me. I always think about the downside when I make a decision – it’s as if I’m constantly asking myself to consider “what’s the absolute worst that can happen?” If I am okay with the downside, then I know that I will be okay under any circumstances. If you ask me, the upside always takes care of itself. Nobody has a problem with his or her plans working out smoothly. It’s when things don’t work out that it’s all a problem – and that’s what I want to be prepared for.

Second, the economic scenario here in the U.S. really has me worried! The financial system is so frozen that it is sucking the lifeblood out of economic activities. Things can get a lot worse still. I can’t help but start to think how a household like ours can run into trouble despite our very cautious and conservative stance with our personal finances.

In the final analysis I’m confident that I will never be totally “poor” when I think of Evan Esar’s quip, “Character is what you have left when you've lost everything you can lose.” Even with the worst case scenario, at least I’ll still have that!