photo by pointnshoot

It has been a rough month in our household.  It all started when my wife took a spill in a parking lot after rolling her ankle.  She severely sprained her ankle, and even did some ligament damage.  She was prescribed crutches for a couple days, and an AirCast for 4-6 weeks.  Fortunately, it appears she avoided the need for surgery, but we won’t know for sure until the boot comes off.  The medical bills for x-rays, the ER visit, the orthopedic follow up, the AirCast, and the crutches are starting to roll in.

When It Rains, It Pours

A few days after her fall, on the morning of July 4th, we awoke to an unusually hot house and a broken air conditioner.  It was a particularly hot day, and by noon it was already hovering near 85 inside our house.  Our service guy discovered a burned out fan motor on the unit outside our home and put on a temporary replacement.  Fortunately, the motor was still under warrantly (barely), but we still owed $125 for the labor.

Over the weekend I was mowing our lawn and the mower died about half way through the job.  The nearest service center is about twenty miles away, so I asked if they could come pick it up.  They said, “Sure, for a $150 fee!”  Of course I said no, and immediately thought about the stuff I had loaded on a trailer that I could use to transport the mower.  When it rains it pours.

Our home computer crashed last week.  I guess it is expected since the desktop is now close to eight years old, which is an eternity in PC years.  While downloading email the system froze, and upon restart it would not boot up, citing a missing or corrupted windows file as the culprit.  I did manage to salvage my wife’s pictures she had transferred from a digital camera, but not backed up (lesson learned).  When I get some time I plan on wiping the hard drive and reloading the operating system to see if we can’t squeeze a little more life out of it.  However, we will definitely be backing up anything we save to CDs and will probably keep an eye out for any good deals on a new PC in the interim.

The real icing on the cake came last Monday evening.  My wife had prepared a new dish that we were all looking forward to trying. We had gathered in the kitchen and the kids were telling me about their day when we heard a loud popping sound.  We looked at the oven and the inside glass panel in the oven door had shattered, spraying glass all over our meal and rendering the oven unusable. We let it cool down, cleaned up the mess, and headed to Subway for dinner.

Moral of the Story

There isn’t one.  I just wanted to vent.  No, I’m kidding.  The moral of the story is that all of these things would have been major, budget-busting events just a couple years ago.  However, with our emergency fund in place at ING Direct these strings of bad luck are just minor inconveniences.  Well, some are more inconvenient than others, but you know what I mean.  Having an emergency fund in place allows us to focus on making the situation right, rather than worrying about how we are going to pay for it.

I’m more convinced than ever that having a solid emergency fund in place should be priority one in any good financial plan.  Our mission over the next two or three paychecks will be to replenish the funds we’ve used over the last few weeks, and hope nothing else breaks for a while.

In response to my recent ING Direct review and a discussion on emergency funds James asked a question in the comments, “How close should they be?” That’s a great question, and one I have asked myself since turning to online banking. A few online banks offer ATM card access, and a couple even reimburse ATM fees for withdrawals. However, the ING Direct Orange Savings account offers no such features. Transfers are handled online and take two or three business days to show up in either account. This presents a dilemma - what if I need access to my emergency savings today?

Start Local and Expand Later

We have decided to save $1,000 locally in a bank savings account, and anything we save above that we transfer to ING Direct. The interest on a bank savings account these days isn’t enough to buy my kid a pack of chewing gum, but I’m more concerned with accessibility.

Keeping a portion of your emergency fund locally provides quick access to at least the first $1,000 of our emergency fund in the event of a real emergency. This would be enough to cover the initial costs for most repairs, out-of-pocket medical care, etc. The remaining emergency funds would show up a couple days later for larger emergencies that required more than this “local emergency fund” could cover.

Select a Comfortable Level for You and Yours

I mentioned that I am not overly concerned with the interest rate on this local emergency fund. However, I do want to maximize any interest income potential with the larger, online emergency fund, so it makes sense to limit our local emergency savings fund to a specific amount. This minimum amount should be decided on by you and your family, not based on a recommendation from someone else. Around $1,000 works well for our family, but it may or may not work for yours, and that is fine.

In uncertain times it makes sense to save a little more. When your checking account has a healthy balance, perhaps you could save a little less. The point is to have something liquid, easily accessible, and local so you can avoid turning to credit cards in an emergency.

Couldn’t I Just Use an Emergency-Only Credit Card?

Sure, assuming you have the discipline to identify real emergencies, and pay off the bill using emergency fund savings when the bill arrives. I have fallen into the trap of using a credit card to finance an emergency with the self-promise to pay it off when I get the bill. The bill arrives, and I am reluctant to use such a large chunk of savings to pay if off in one payment, so I rationalize that I will pay it off over time since the credit card’s interest rate is low, or because I like having the safety net of cash in reserve. Now I am stuck with a revolving balance that with interest is causing that emergency to become more and more expensive with each billing cycle.

The only way to get off the never-ending hamster wheel of debt is to stop using credit cards and loans to finance life events. Create a local emergency fund to catch the small stuff, and a larger, fully-funded emergency fund online to save for life’s curveballs.

The first step in any good financial plan is to establish an emergency fund to handle life’s emergencies and break the cycle of turning to debt. However, some people feel a reluctance to use the fund in an emergency and turn to credit cards to cash flow each bump in the road. This phenomenon is driven largely by fear – fear that a bigger emergency will happen before adequate time to rebuild the [tag]emergency fund[/tag]. Here are a few strategies to combat that fear.

Think of your emergency as a personal line of credit. It might even help to sign up for an account that offers a debit card. I keep my emergency fund debit card in my wallet with one of those ATM card slips that says, “Break only in emergency!” When Murphy strikes I use that debit card to tap my emergency fund rather than turning to a credit card.

Hang on to your oldest, no-fee credit card until you have established several months of savings. By keeping one credit card with available credit you still have a backstop should you have the unfortunate luck of getting hit by two emergencies in the same month. Be sure that the emergencies are real emergencies – clearance items at your favorite store do not qualify.

Emergency funds should remain in a highly liquid account. The majority of your emergency funds should be socked away in a high-interest savings vehicle, like an online savings account. We also keep a local, smaller emergency fund in an interest-bearing checking account (with debit card access). I could get a higher rate of return on this smaller amount elsewhere, but I have discovered that the higher the rate of return on my money the more pressure I feel not to touch it. This is especially true of holding an emergency fund in stocks or mutual funds. If the market is up, I don’t want to cash out because it might go higher. If the market is down, I don’t want to cash out until it goes back up again. Best to simply keep the emergency fund in easily accessible cash.

Make rebuilding your emergency fund a top priority after each expenditure. If your car died last week and the repair bill topped out at $600 you should quickly find a way to refund that $600 back to your emergency fund. Stop paying extra on your debts until that $600 has been replenished – minimum payments only. Take some extra overtime next week. Round up some old books and DVDs and sell them on EBay. The point is to make rebuilding that emergency fund your number one priority. Having that plan in place before the emergency will make it easier to swallow the $600 hit to your emergency fund, because you know it will be quickly replenished.

Much has been made in the news over the last few weeks and months regarding an impending recession in the U.S. economy. Talking heads spend hours and hours telling us what impact the recession will have on the global economy, but the average citizen in mainstream America just wants to know the impact on his personal economy. With that in mind I offer the following tips for surviving a recession.

Increase your cash position. Entering a recession proves to be a good time to increase your cash position. Not only does a healthy emergency fund help pave over short-term bumps in your household finances, it also allows you the opportunity to find some excellent deals in the investment and real estate markets. Institutional investors make a lot of money buying on the way down, and the same rules apply to the individual investor. If you are fully invested, or fully leveraged, you probably lack the cash to take advantage of these deals.

Consider allocating more investments to international markets. If the U.S. recession deepens it will have an impact on other markets because we are in a global economy. However, the losses may not be as severe, and other external factors may help international markets continue to grow even in a U.S. downturn. To hedge against deep domestic losses it’s always advisable to keep a percentage of your investments in foreign stocks. Entering a recession it might make sense to boost that allocation percentage in an international fund and reduce domestic investments, in the short term.

Get smart – learn a new skill or add to your current skills set to make yourself more “layoff proof.” True recessions are usually accompanied by massive layoffs. In this particular recession, the financial services industry could be hardest hit. Now would be a good time to consider taking that online class or pursuing some cross-training to make yourself more valuable to your organization. It might make the difference between getting a pink slip or getting a raise.

No Chicken Little, the sky isn’t falling, but just in case. Recessions tend to bring out a lot of doom-and-gloom commentary. I personally have faith in the U.S. economy and do not think we are headed into another depression. Still, it is a good idea to review your family’s emergency plan. Stock up on basic necessities, including non-perishable foods and a few gallons of water. Instead of running out and buying these things all at once, just pick up a few items along with your normal, weekly grocery trip and over time add to your stockpile. In our current environment this is something we should already have in place in the event of a disaster (natural or otherwise), and news of a recession serves as a reminder.

Surviving the recession and need to save money at the grocery store?  You can get coupons here. We have a large selection of printable coupons you can choose from. You can get printable grocery coupons for any type of item you need from a grocery store.

You know Murphy, the guy that comes around and throws a giant wrench in your plans (also the author of [tag]Murphy’s Law[/tag]).  Lately, he’s been hanging out around our place and he has definitely overstayed his visit.  Last night my wife went to the refrigerator to start preparations for dinner and noticed that the food did not feel cold.  A couple months ago our fridge stopped working and we had to wait four days for a Sears repairman to visit, living out of a cooler during that time.  At some point during those four days the thing started working again, so naturally the repair man shows up and says everything is working fine.  The complex diagnosis cost us $60 in a non-refundable “service fee.”  We did get a few tips of things to try should it happen again, which we employed last night to no avail.

So, about 10:00 last night we embarked on a refrigerator cleanup throwing out most non-essentials and older leftovers.  I ran to the store to grab a few bags of ice and we transferred condiments, drinks and a few packaged foods over to a cooler.  Now we’ll wait it out for another visit from a repair man.  We aren’t paying another $60 fee, either.

Just when I thought things couldn’t get any worse I awaken this morning to discover a [tag]credit card[/tag] payment posted a day early, and resulted in five non-sufficient funds charges to my [tag]checking account[/tag].  Yes, five – for a total of $175!  I almost fell out of the chair.  I plan to visit my bank during lunch, hat in hand, and beg for mercy. I feel I owe at least one for my calendar error, but FIVE?

Both of these incidents remind me of the importance of a solid [tag]emergency fund[/tag].  The refrigerator dying and my banking screw-up have the potential to be a real budget-buster this month.  Assuming I have to pay for both Murphy attacks I can always move some money over from my emergency fund, and then replenish it when things return to normal.  I have to admit these two items have knocked the wind out of me, but without that padding I would be a lot more upset.

Buy appliance parts online and save.