Importance of Emergency Fund over-emphasized by most finance gurus

By BOB CUNNINGHAM

This week’s post is being sent to you via Lake Tahoe, NV, and I gotta tell ya — it’s friggin’ beautiful up here.

But of course, you don’t read this column to hear about my vacation travels, so let me get right to business. I will note, however, that I have intentionally shortened this post in the interest of time (as in, more time for me to play!).

Okay, so did my headline catch your attention?

The idea that having a monetary reserve to cover you in the case of an unexpected significant expense is, on its face, a no-brainer.  We don’t want to have to borrow from friends or family, or go on a Top Ramen diet just because the car radiator is leaking and needs to be replaced.

But the notion that the majority of folks should put emergency funds in a savings account, which yields virtually no interest, while maintaining a credit card balance that charges more than 20% APR, strikes me as non-sense.  Many of the most prominent minds in the world of personal finance insist that you have at least $1,000 – preferably a lot more – set aside and accessible before you pay off debt, invest for retirement, etc.

Phooey on that. There are more productive ways to accomplish the same thing.

The main concept behind emergency money is that it has to be liquid… but that doesn’t mean it has to be as liquid as bank ATM access. Withdrawing from investment accounts, life insurance cash value, and even tapping a credit card can be utilized smartly to accomplish the same goal – and allow the individual to have his or her money working at full income-producing capacity in the meantime.

For example, if you are currently investing in a Roth IRA, you can withdraw the monies you’ve put in (but not the growth) without penalty.  This is, of course, not the ideal scenario for gaining quick funds to pay for an emergency because you want your investment account money to stay put and grow using the magic of compound interest.  But the setback is usually temporary if you do need to tap the funds, and the smart money managers account for the scenario of not having an emergency as well as the what-if something bad happens.

The idea that we probably won’t need those funds set aside for an emergency is the basis of my approach.

If you have a permanent life insurance policy – which I will talk about in detail in a future post coming soon – you can withdraw dividends the policy has earned and/or borrow from the policy’s cash value.

In both the above instances, the average time to have your money in hand is about 3-5 business days.  So you’re probably thinking that in an emergency, you might have to have the money RIGHT NOW.  Then what?

That’s where the credit cards come in.  You see, using a credit card to pay for an emergency is only a dubious idea if you’re not prepared to pay off that charge before the end of the grace period.  But if you use the card to pay the emergency cost as it happens, then use one of the two above scenarios to pay off the credit card, you’re golden.

Now, I realize that not everyone has money invested in a Roth or has insurance cash value to tap, or wants to bother family with the ultimate taboo question.  For some, who truly have no other means to cover a significant unexpected occurrence, it’s a choice between putting some unproductive cash aside or rolling the dice with the knowledge of using a credit card if absolutely necessary and perhaps paying a higher cost in the process.

But people should be aware of all their options, and quite frankly, I’m sick of reading about concepts that are allegedly Finance 101 when, in fact, the logic is potentially faulty.

Understand all the choices and consequences, and then proceed with the best strategy for your particular situation.  Don’t get pigeon-holed into following the masses.

As always, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Top 5 LEGIT Personal Finance Books

By BOB CUNNINGHAM

Ever since I became enamored with personal finance and, more specifically, unearthing guru-promoted myths, I have developed my favorites from the list of all the PF books I’ve read over the last decade-plus.

Now before I go any further, I want to point out that just because a book may not have earned a mention in this space doesn’t mean that the book in question doesn’t offer some value (how ’bout that artfully crafted triple-negative?!).  There are money authors out there who I personally believe are way off the mark in several areas of finance philosophy (mostly those who insist government programs are the best way to save and invest), but I nevertheless agree with them on other topics.

With that caveat out of the way, the following is a summary of the books that are the most worthy of you spending your money to obtain, simply because they offer information that, in my opinion, is generally spot-on with what is best for the vast majority of people.  These selections are easy to understand, follow, and implement, yet don’t dumb things down to a juvenile level.

Many of these books support somewhat unorthodox solutions, and are even outright contrarian to some of the most popular conventional advice.  In many instances, the courage demonstrated by the writers is a primary reason I like the work.

All are available through normal sources, so I won’t be delving into individual websites, book costs, etc.  Just titles and authors, and why I believe they’re worthwhile:

1. The Bank on Yourself Revolution, by Pamela Yellen

A topic of this blog in the near future, and indeed it will be arguably the most important post I’ve ever written, will be about how the correct type of whole life insurance is far and away the best tool available for short-term and long-term savings, retirement planning, funding college educations, and more.  Yellen, who should not be confused with Janet Yellen, the current Chairperson of the Federal Reserve, summarizes the in’s and out’s of this strategy in the most contemporary sense considering the philosophy itself is more than a century old.

Earlier works, such as Become Your Own Banker, by Nelson Nash, are better known in the financial publishing sector, but Pamela Yellen’s most recent release is the best guide to understanding and implementing the approach now.

2. Last Chance Millionaire, by Douglas R. Andrew

The author of two preceding and related works, Missed Fortune and Missed Fortune 101, Andrew lays out an extensive strategy regarding the value of mortgages, tax management, and arbitrage… this was the first book that led me to conclude that so much conventional personal finance wisdom is hokum.

In my opinion, combining the strategies laid out in this book, and the Bank on Yourself approach in No. 1 above, can put folks of numerous financial categories onto a path that results in superior overall results.

3. Money: Master the Game, by Tony Robbins

Better known for his dominance of the personal development niche, and a guy who gets a lot of unwarranted flak in my view, Robbins put together a marvelous all-star team of financial experts and lays out an outstanding overall plan to take care of virtually all areas of finance.

Robbins didn’t try to pretend he is the expert, although he comes off a bit arrogant in acknowledging that his celebrity gave him the ability to contact, and sit down with, literally dozens of influential, acknowledged money master minds. His newest spin-off release, Unshaken, was mostly a disappointing re-hash of many of the points he was able to make in MMTG (i.e., a not-so-subtle attempt to milk the cow twice during the same dawn), but that misfire doesn’t detract from his successful initial foray into personal finance education.

4. Multiple Streams of Income, by Robert G. Allen

Another author who strayed from his primary expertise — in this case, Allen is a noted real estate investing pioneer who has penned numerous best-sellers on that subject — to delve into areas related to personal finance.

Talking about a myriad of ways to increase income (and thereby, cash flow) is admittedly a bit of a stretch, especially compared to the direct impact of the first three publications on this list, but Allen covers so many straight-forward, self-generating income concepts that you can’t help but significantly improve your bottom line just by implementing one or two of them in addition to how you currently make your living.  I had to include it here, because it has been so influential on me.

5. Think and Grow Rich, by Napoleon Hill

Okay, so I had to go a little conventional on you, but for good reason.  Simply put, no credible listing of top financial books can omit this one.  It’s the one that started it all, so to speak.

To be blunt, I only took a few things from this book that have had direct impact on my personal finances or life approach, but to be fair, that is because I got my start in this type of information-seeking relatively late in life.  For anyone who wants a solid foundation from which to begin seeking legitimate wealth, this is the one and only book to start with.

As a special show of respect, I will give one other title a mention in the same “breath” as TAGR, separating it from my list below of others worth reading:  Rich Dad, Poor Dad, by Robert Kiyosaki.  Interestingly, I have found myself drifting away from Kiyosaki’s line of thinking for the last few years because he’s gone somewhat in the direction of doomsayer, but I admire the unique perspective he brings as well as his obvious enthusiasm for what he believes to be the smartest philosophy there is on money.  I’ve learned a great deal from his series of books in addition to the one that started it all for him.

HONORABLE MENTIONS

Automatic Wealth, by Michael Masterson;   Start Late Finish Rich, by David Bach (author of another good work, The Automatic Millionaire);  The Smartest Investment Book You’ll Ever Read, by Daniel Solin;  The Index Card, by Helaine Olen and Harold Pollack.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Buying a home is a valuable step, but don’t do so until your financial house is in order

By BOB CUNNINGHAM

As my wife and I enjoy a brief vacation here in beautiful Big Bear, Calif., about 90 minutes northeast of L.A., the vast view speckled with wonderful homes got me to thinking about my next blog post.

One of the most prominent among the numerous dilemmas that face young adults as they attempt to successfully establish positive financial momentum is when to pull the trigger on the purchase of a house… and thereby cease building someone else’s net worth.   Put another way, there are giant advantages to buying a home versus renting for the people who are reasonably in a position to make that leap.

With renting, you are squandering money monthly.  Okay, I don’t mean that in the literal sense – your rent gives you a place to live for 30 days or so.  But once the month elapses, you have absolutely nothing to show for the rent you paid.  Also with renting, you can’t make any improvements without permission from the owner, must trust the owner to make needed repairs in a timely manner, and are restricted by the owner on whom you can have living at the home, whether you can sub-lease… a host of potential restrictions.

Sounds almost like the government, eh?

When you own the home, it is YOURS even though you don’t get sole ownership until after the mortgage is paid off.  And who cares about that technicality as long as you don’t have the bank manager claiming dibs on the master bedroom?

Seriously, as long as you continue to pay the bank as promised when you signed the loan documents, you can do pretty much whatever you want with the home, and have anyone live with you as you please,   More importantly, every payment you make builds equity (wealth) for you in at least one of two ways – by paying down what you owe, and by possessing a commodity that appreciates in value more often than not.

And believe it or not, it is often better to owe money to the bank on your home than having it paid off free and clear.  I will explain in detail why that is in a future post.

Back to the benefits of owning.  Did I mention a very huge tax benefit?  Interest paid on a mortgage loan is (virtually) always deductible as a write-off.  On a new loan, of which much of the payment is interest, that can add up to $10,000 or more in a year.   And you can write off the property taxes, too.

Conversely, rent is not tax deductible.  And don’t even think about the paltry renter’s credit.  There’s no comparison.

But wait!  In your adult life up to now, the money talk has likely been about saving more, spending less, and eliminating debt. Doesn’t buying a home go against the grain in that it represents spending and most certainly is NOT eliminating debt but is instead creating it?

Well, as usual, that depends on your specific circumstances.

Of course, I should clarify that I am referring to a young couple or family’s first home, not a vacation castle in the mountains such as those we’re surrounded by up here.  With that in mind, let’s skip past the how’s of buying a home – entire books have been written on that subject – and focus here on the more crucial “when?”

Many folks fall into two broad categories when it comes to making this decision, and neither are ideal.  The first group is intimidated by the idea of such a massive commitment as buying a home – the process of finding the right place, determining what they can afford, qualifying for financing, having enough for a down payment… it can be overwhelming the first time around.  They’re scared to death to make the wrong move.

The second group jumps into the fray before it can really afford to.  A pay raise of 50 cents an hour with a promotion to assistant to the assistant manager, and a proclamation is made that it’s time to ditch the studio apartment in the low-income district and go get a two-story with a pool in the suburbs.

Hold on there, Trump!  Somewhere in the middle, with a lean toward the overly conservative first group, is where you ideally need to be.

There are essentially four factors that should be in your favor before even considering the decision to buy a home:

1) Gainful, secure employment.  If you’re not solidly employed, you won’t qualify for financing anyway… but nevertheless new home-buyers need to have a steady income stream that can be reasonably counted on (note, however, that there’s no such thing as absolute job security or a slam dunk success in business). In short, you should be working at a stable job that you like enough to make a mental commitment to it indefinitely.

2) Little or no other debt.  A car payment is OK, or absent that, a SMALL amount of other debt.  But if you’re into credit cards and other unsecured commitments more than a few hundred dollars, it is wise to get that taken care of first. And if you have undesirable debt yet have saved what you believe to be enough for a down payment on a house, you should likely use all or most of those funds to pay off the debt instead.

3) Appropriately frugal spending habits.   You’re living below your means, putting money away monthly and are comfortable sticking with “staples” like a cellphone which isn’t the absolute latest, greatest model and technology.  And you’re cool with eating Tuna Helper or Swanson dinners more often than not even during LobsterFest.

4) You’ve got at least a few months of savings built up already.  Stuff happens, so you certainly don’t want to be in a position to get behind on your mortgage if your transmission goes out.

Did you notice that I didn’t specifically make having the money for a down payment a requirement?   Let me explain:  Many, many folks get caught up in the idea that they can’t or shouldn’t attempt to buy a home unless they’ve saved enough cash for a legitimate down payment – 10%, 20% or even more.  It simply isn’t true.  First-time buyer programs today are… well, first-rate.  Some even require as little as a 1% down payment, and FHA’s basic first-time buyer program requires only 3% down.  Closing costs must be accounted for, too, but some programs roll those costs into the loan.

There is a negative to a lower down payment – Private Mortgage Insurance.  PMI is charged by the lender whenever a loan is made on more than 80% of the appraised value of the home (in other words, you put down less than 20%).  It is expensive – as much as 1% of the outstanding balance on the loan annually) – and undesirable, but not so costly that it should prevent wanna-be homeowners from going forward assuming they otherwise have the means.  The numerous benefits of owning your abode outweigh the temporary nuisance of PMI in most cases, and as soon as you have established equity of more than 20%, you can contact the lender (they will not do so automatically) and request the PMI be cancelled.

THE KEY FACTOR HERE ISN’T HAVING A BIG DOWN PAYMENT, IT IS AVOIDING TRYING TO BUY TOO MUCH HOUSE.  Banks have their own rules about “how much home” you can afford.  My recommendation is to see what they will approve, and reduce that amount by 20-25%.  Why?  Because it will virtually assure that you won’t buy more home than you can swing.

Simply put, be willing to dictate the terms, or be willing to walk away and try again in a few months.  Believe me… the latter is grossly preferable to getting in over your head, assuming the lender guidelines would even permit such a circumstance.

Good common sense (hmmm… is there such a thing as bad common sense?) will usually be accurate in determining when you can and should move forward with the big step of buying a residence.  Don’t get eager and foolishly proceed before you’re ready…

But you should also avoid standing pat just for the sake of it.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Results are NEVER guaranteed.  Utilize the information as you see fit, invest at your own risk.

Credit cards are only detrimental when they’re not used properly

By BOB CUNNINGHAM

In a perfect world, everyone would carry about four or five credit cards yet no one would have a balance at the end of the month.

And now back to reality…

Okay, I suppose I should lend some clarification to that opening paragraph:  The truth is that credit cards can be our friends, and actually enhance our wealth (primarily on a smaller level) IF they’re not misused and/or abused.

There are varying attitudes about plastic money – ranging from considering them indispensable to labeling them as downright evil. Mostly, though, they are simply misunderstood… and most definitely improperly utilized. Bottom line, if you use credit cards with some intelligence – and a big heaping helping of common sense – you will benefit.

The vast majority of people, especially young adults as well as teens unlucky enough to have access, use credit cards to purchase “stuff” they can’t afford otherwise.  A new stereo system, the most up-to-date cellphone, that dope blouse she just has to have… these are items that fall under the immediate gratification category, and should only be bought with saved cash that has been set aside for that specific purpose.

We’ve all been in this situation, or at the very least known someone who has.  A giant credit card balance is run up, but when the bill arrives and only asks for a minimum payment of $25, we reason that we can afford that… so what’s the problem?

I just wrote about how credit cards work, their interest rates, and how paying off an account one minimum payment at a time is a long road to ‘Brokesville’ in a recent post.  Instead, what we want to touch on this time around is how Visa, Mastercard, Discover, and the rest can be used in our favor.

All those offers we receive from credit card issuers via spam or junk mail are due to what has become an extremely competitive industry.  Credit card companies realize you have a lot of choices, and they want to come off as having the best available perks.  This attempted “one-upsmanship” by these companies works in your favor, and you should be prepared to pounce – the correct way.

In fact, credit card companies will work so hard for your business, most are willing to pay you to use them. Seriously. They offer incentive in the form of rebates – cash credited back to you depending on what you buy, where you buy it, and how much you spend.  Used wisely, this is a boon for you.

For the sake of discussion, we are going to focus in this space on cash-back offers as opposed to frequent-flyer miles or any other type of credit card rewards. The principles I’m about to reveal are similar with all of the above.

Essentially, there are two types of cash-back cards.  Some, like Capital One, offer a flat percentage of cash-back on every purchase you make using its card.  I believe that rate is currently 1.5% back (at least, that’s what Jennifer Garner and Samuel L. Jackson have been telling us).  And those endorsers push the “we pay on everything” aspect very hard.  No messing with odd offers on specific items, they will tell you.  Just use their card anywhere and get a reward every time.

Others, like Discover and Chase, have promotional offers that usually go by quarters during the year – three-month time-frames.  This may sound somewhat limiting, but the fact is they represent a much better overall deal for you.  For instance, a card might offer as much as 5% cash back on gasoline purchases from January through March, then switch to groceries for April-June.  In addition, they typically offer a flat 1% on everything else.

Pretty sweet, I say.   If I spend $80 at the supermarket, that’s $4 refunded to me by my card. That’s enough to cover my box of protein bars. Works for me.

If you’ve read this far, you probably have a question similar to the following:  OK, the cash-back is nice and all, but it defeats the purpose to run up a big balance that charges 20% interest or maybe more. You can’t use a credit card to buy necessities!  That’s a sure-fire way to bankruptcy, isn’t it?

Am I warm?  Well, the answer is that running up a balance would be utterly stupid and would, indeed, nullify the advantage of these comparatively small cash-back offers.  But who said anything about running up a balance?

Bear in mind that these purchase examples are things you would buy anyway.  Most folks need gas for a car, or a motorcycle, or whatever… and EVERYONE needs to eat. The trick is simply to use the appropriate card when the items are bought, then have the basic discipline to pay the account in full during the grace period rather than allow the charges to accumulate.

Shazam!  Free money.

Of course, I’m guilty of glossing over the part about paying the balance in full each month.  For many, many people, there is NOTHING SIMPLE about paying off several hundred dollars in one click, swipe, or written check.  But for this to work for you, it MUST be done without compromise.  Every single month.

Think you can take advantage of this simple strategy without going into debt that lasts longer than a couple of weeks?  Great!  If you can, here are the steps to make things easier to get going:

1. Do some research into different card offers to see which offer what rewards in specific categories.  Ideally, you’d like to get access to as many 5% offers as possible for different types of purchases. (Note:  At this writing, American Express is offering a card with a short-term 6% cash-back on groceries, but the card carries an annual fee and some other disadvantages.  Be sure you know exactly what is required and included before you apply).

2. Try to end up with three cards – one you can use for groceries, one for gas, and a third for eating out – restaurants are a common category for cash-back promos but, of course, don’t over-use this to the point of spending more to eat than makes sense.  Be smart.  You may not find 5% cash-back cards for all three categories, and if you don’t, 3% is still decent.  Also, a fourth card for miscellaneous purchases with a steady cash-back percentage is nice to have available.  But again, discipline in its use is everything.  Only buy necessities you would have bought anyway.

3. Budget yourself so that you are not spending more on these various categories than you otherwise would, especially if you get a good restaurant cash-back deal.  Not to beat a deceased pony, but it makes zero sense to defeat the benefit of this strategy by over-spending.

4. Look up each account you obtain and note the monthly payment due date.  Prepare to pay off your monthly balances at least a week ahead of this deadline.  Don’t cut it close.

5. Stay on top of every account constantly.  One practice I do that helps me stay organized is to go into my online banking on my personal bank account and update the amount to be sent to each credit card issuer as I make the purchases.  I don’t suggest you rely on remembering to make these payments, or try to get cute in timing them.  Enter them well ahead of time and update the growing amounts until those payments are automatically paid on the dates you pre-set (remember, a week ahead of the actual payment due dates).

6. Have fun with your cash-back by putting $25 increments into gift cards for whatever.  Or better yet, if the card allows (most do), use the cash-back as a credit right back into your account.  This isn’t as fun, but makes better use of the funds you gained by using the cards.  It’s kinda cool to charge $238 worth of gas and pay only $213 because the other $25 came from rewards.  Over time, these savings really do add up to be significant.  To truly appreciate and enjoy the bounty, track these numbers and the overall return.

Credit cards are great if you use them smartly, and incredibly harmful if you don’t.  Be among the former.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.