There are many places to keep an emergency fund, it all depends how you approach it.

We like to put ours in a Tax-Free Money Market Fund. Yes the interest is low but we view our emergency fund as a type of “Insurance” and not an investment.

Some people like to put keep there savings in a Saving Account at the bank, others in stocks, some even gold, and other mutual funds. Each place has a unique combination of the qualities you want – safety, liquidity, earnings rate and convenience. If you are smart, you probably won’t leave all your cash in a place where it is earning little or no interest. But neither will you put it all where it might be spanked if a recession hits.

The way you make up your mind depends on how conservative you want to be. Money in your checking account, strictly speaking, is working capital which you continually turn over as you pay bills. Still, there is a residual amount below which you seldom go, say $1000 or $2000. If you maintain such a minimum, this could be included in an emergency fund. However, I would never keep an emergency fund in the same account as a checking account. This makes it too easy to disappear. An Emergency Fund is for EMERGENCIES.

When you buy stock, you buy a share of a business for better or worse and take your chances on whether or not it thrives. Of course most stocks are extremely liquid, so you can always get back cash. How much cash, however, is never predictable. It always seems to turn out that when you have to sell a stock in order to obtain cash, the market is down at that particular time. Stocks, therefore, should probably not be considered as part of an emergency fund. But if they are, they should never be carried at 100% of their current price.

Cash reserves in life insurance policies are savings in one sense since you can get them back at any time. To do so, however, you either have to borrow the money back, usually at 5% to 6% interest, or you have to cash in the policy and lose its protection. One problem in borrowing the money from the account is that usually the amount borrowed is “unplugged” from the investment and stops earning interest.

There are other hard-to-measure assets that many families have that might be included in an emergency fund, for example, money built up in a 401K or IRA or ROTH IRA. This is definitely an asset under certain conditions. But there are penalties associated with taking the money out.

If you don’t know exactly how much of these assets to include in your emergency fund, try making up a report on your available resources. You might arrive at two figures, the first being bona fide cash reserves readily available, the second being your ultimate resources available in extreme emergencies.

Building up an emergency fund before you start to invest will save you worry and probably save you money. With such protection you can buy good quality growth stock mutual funds, sit back and let them appreciate in their own good time. You won’t have the haunting thought that you might have to dump them at a moment’s notice. And remember, fate often decrees that when you have to sell at a time not of your own choosing, that will probably be just the worst time – the time when the market is temporarily depressed.

An emergency fund should obviously be reserved for bona fide emergencies: serious illness, loss of job and so on. It should never be borrowed for such relatively unimportant uses as the purchase of a car, house or Flat Panel LCD TV. It should not be loaned even to close relatives except in cases of dire need.

As to how big the fund should be, an old rule of thumb says a family should be able to live for six months if its regular income were cut off. Interpreted conservatively that would mean that a family’s liquid savings, minus its short-term debt, would equal one half its annual take-home pay. Interpreted very liberally, it might mean that a family should be able to lay its hand on enough cash by various means to live six months.

In addition to liquid savings, certain other assets might be counted: cash value of life insurance policies, stocks conservatively valued, the amount invested in a 401K retirement plan. However, there are dangers of this practice. The cash value of a life insurance policy might be needed to keep up premium payments. Stocks might go so low, in a the recent recession for example, that it would be a shame to sell them. The amount vested in a 401K fund might be obtainable but with penalties attached. So for defense against a financial crisis, a family should certainly rely largely, if not wholly, on liquid savings.

There are four qualities you want your savings to have. Remember we looked at if an Emergency Fund was an “investment” or not. These qualities will pretty well determine where the money is to be kept. Listed in order of importance, they are:

Safety – You want your money to be reasonably secure against depression, panic and theft.

Liquidity – You want to know that you can withdraw your savings without too much delay.

High earnings rate – You want your money to earn interest at as high a rate as possible consistent with safety and liquidity.

Convenience – You want your savings to be located where you can take care of them with minimum trouble.

No one institution provides the maximum safety, liquidity, earning rate and convenience all in one package. It would be nice to have a place right across the street that would keep your savings completely safe and entirely liquid, while paying 15% interest. Naturally there is no such place. To get a high interest rate you must sacrifice some other advantages, such as liquidity. To have your savings instantly available you must be prepared to accept a lower interest rate.

It may be best, therefore, to split up your cash and put it in several places.

In general, we have found a tax-free money market account to be an excellent place to park money for our emergency fund.

How about you? Do you have an emergency fund? If not… get started today!

One of the first “rules” in investing is: Don’t use money that you may need for something else. The reason behind this thinking is that even the most carefully selected investment probably won’t appreciate in value all at once. It may take years for it to fulfill your hopes and expectations. In the meantime, as the stock market goes up and down, the value of your stock holdings may at times be below what you paid for it. We’ve seen that during the current recession where the stock market lost about 40% of its value. Now, if during such a dip in price you happened to need money desperately and had no reserves for emergencies, you might be forced to sell out at the worst time.

That’s the reason, one of the first investments anyone should make is to put away a certain amount of money in an emergency fund. If you have such a fund, you can approach the problems of investing with a freedom from pressure and worry that will enhance your good judgment.

Strictly speaking, an emergency fund is not an investment since investing implies converting money into stocks, real estate or something other than cash. Nevertheless, an emergency fund can earn interest or dividends and grow in value. So it is an investment in a sense. Several questions arise about a fund of this kind. What’s it for? How much do you need? Where do you put it?

Let’s assume, for a minute you have went through the steps and filled out two of the three columns in your net worth and cash forecasts – Last Year & Estimated This Year. Things overall look pretty good. From the numbers it looks like your net worth will grow through the year. It even looks positive that the bank balance will increase to a level higher than what is necessary to provide sufficient working capital. With all of this bright picture it definitely is not the time to plan a trip to Hawaii. First, take pad and pencil and make a list of some of the things that are going to be needed – or even just wanted – during the coming year. These may be things that weren’t bought last year, so these have not been calculated in the forecast. New car? New clothes? Kids going to summer camp or college? Fix the patio? Replace the refrigerator?

Write down a few items and the projected cash balance may begin to take on the appearance of a deficit. This is the time we call a family budget meeting. What comes first, the new refrigerator or new clothes? How are you going to pay for it? Use cash, borrow or sell something? Since you are looking at the money several months out, you have plenty of time to figure interest charges if you decide to buy on credit. Or maybe you might decide (which I would) to use our savings rather than borrow. If possible, treat this as a loan to yourself, to be repaid later.

Once you decide what you want and how to pay for it, begin to check on the dates of future sales and prepare to grab a bargain if you can.

Are you thinking of buying a house, trading in the car, taking out more life insurance or starting to fund your 401K plan? You can figure out exactly how it will work by getting some scratch paper and sketching out rough net worth and cash forecasts as they would appear with the proposed changes. There are pitfalls to be avoided in making hypothetical forecasts. For example, if you are planning to sell some stock for example or a piece of property, don’t forget that you will have to pay a commission and possibly a capital gains tax. Settlement charges in real-estate transactions can amount to thousands of dollars.

After you have been comparing actual expenses with your forecasts for a while, you should begin to see some patterns evolve. A sudden or unexplainable change is worth reviewing. If the “family shopper” is on his or her toes, your spending for food should stay fairly even. A steady expenditure indicates that shifts are constantly being made to buy goods that are in season or in plentiful supply. If the figures jump up and down from month to month and there is no ready explanation, it may be a sign of careless or impulsive buying.

There is much additional interesting news about your family that a financial forecast will tell you. But don’t ask it to do too much at first. Start out simply with not too detailed a breakdown of expenses. Keep the sheets handy with the checkbook and bills. Label them clearly Forecasts. Budget is a nasty word. Setting one up is an unpopular business. It would be too bad if anyone discovered that that is actually what you have done.

Once you have taken the steps to complete your cashflow and net worth forecasts you are ready to get down to business. Maybe the process took several evenings get everything figured and entered, but it will be worth it. You have now created a wonderful tool that has many, many uses. Let’s look at some.

First of all, you should now have a pretty good idea of where all of your the money has been going. As months go by, you can begin to put together a pretty smart guess as to where it will go in the future. By knowing future demands, you should be able to eliminate some overhead. Bank service charges can be cut and or eliminated. I did by using my debt/check card one time per month. Borrowing can be kept to a minimum. Maybe you will be saving a bit more in the months ahead. If, on the other hand, you are spending more, you should be able to quickly see where it is going.

The fuel which keeps a business operating smoothly is its working capital. A business may have buildings, equipment, tools, trucks and other fixed capital worth millions, but if it does not have the bank balance to meet its payroll and buy raw materials, it cannot survive. In other words, a percentage or proportion of the capital of every business must be in liquid form. And the same is true for a family.

In every family, and in every business, there is a ratio between working capital and the amount of money flowing in and the money spent. The working capital of a business is defined as the difference between its current assets and current liabilities. Any company likes to feel that it can easily meet its regular obligations and take advantage of buying opportunities or chances for expansion if they arise.

Assume that a family’s working capital is simply its average checking account balance. Use your cash forecast to estimate your own. For each period, average the initial balance after you have deposited your paycheck and the final balance. Then average all twelve. This figure has a definite ratio to your net worth. Take the family with the $300,000 house and two cars. It obviously runs a bigger total of monthly bills and needs a bigger bank balance than a family that rents a small apartment and has one car.

When a businessman’s working capital is too low it puts him under a strain. He feels as though he were driving a car too fast. There isn’t enough time to slow up or change course if a sharp bend appears in the road.

In the same way, many families keep too little cash available for day-to-day living. The reason is usually not lack of money. Rather, the money available is poorly distributed. Too much is tied up in fixed assets such as a house and a car, or in an overambitious investment programs or the credit card balance is maxed out buying “stuff they needed” and interest is eating away every month. Bad money management may cause bank service charges to be unreasonably.

By keeping an extra $500 or $1,000 dollars in your account, you might save from crisis living overdrafts. An average bank balance equal to one month’s income is for most people a comfortable level.

Too small a bank balance can also cause unnecessary short-term borrowing and prevent the taking of discounts for prompt payment. It can even hurt your credit by making you late in paying bills. But worst of all, it can cause all kinds of worry, stress and strain as payday approaches and the bank balance sinks dangerously close to zero.

After your have your personal cash flow statement in place it is time to look at your net worth. Calculating net worth is comparatively easy but many consumers make it much more difficult. Forget about your income and your living expenses. A water pipe does not care what quantity of water flows through it. All you are interested in now is what you are catching in the reservoir.

Take your net worth forecast sheet and list in the left-hand margin your major assets. Omit minor items such as personal possessions, clothes, and furniture. Stick to such things as the market value of your house, car, stock and bonds, the amount in savings accounts, the cash value of life insurance policies and the actual cash you have on hand at the end of the period.

Use this Online spreadsheet and visit the “Consumer Equity Sheet” tab at the bottom.

Next list your liabilities. These will include the balance you owe on the mortgage, the balance you owe on other debts such as the loan on your car, and bank loans. Use a red pencil for last year’s figures, green pencil for this year’s estimates and blue pencil for actual results.

To get your net worth at the end of each month, simply subtract total liabilities from total assets. The month-to-month increase probably won’t look too large, but let’s face it, that’s all it was. Maybe you can do better, but don’t fall for the temptation to begin a new intense savings program on the spur of the moment.

There are a couple of tricky things about your net worth. Theoretically your house is depreciating, losing value because of increasing age. But maybe over the past years the actual market value has gone up because of inflation. Here is the way to handle this part of your net worth forecast. For all last year’s months simply list what you consider the market value was at the beginning of last year. To get this year’s figure, make a new estimate in the light of the condition of the house and the real-estate market today. Use this figure for all months of this year, and plan to revalue again at the beginning of next year.

Your car is another item somewhat hard to assess. A car loses value much faster than a house. Depreciation plus obsolescence (going out of style) reduces a new car’s value by 30% to 40% the first year, 15% to 20% the second year, 10% to 15% the third year, and around 10%, 9% and 6% in the years succeeding. The person who opts for a new car every year has an average annual depreciation expense about twice that of the person who keeps his car six to eight years. This is a real decrease in net worth, which shows up unmistakably in the trade-in allowance.

Figure how much your car has depreciated from its original cost. If it is two years old, it has depreciated 45% to 60%. So for its present worth put down between 40% and 55%. The exact figure will depend on the condition of the car. At the beginning of next year its value will have dropped another 12-1/2 % on average. So during this year lower the value by one twelfth of this amount each month. Say you figure it is worth $8750 now, but will be worth only $6560 in a year. Each month its value will drop around $180.

The reason you can look at your net worth statement as – A Place of Hope – is that every month you can see as you are paying off debt how your net worth grows.

When you begin to take hold of your finances the first place to start is looking at your cashflow.

You can use a spreadsheet but many have found like I have that putting it down with pencil and paper makes it more real. Let’s keep it simple… no computer needed. Take a sheet of paper, leave a wide three-inch margin on the left, then divide the rest of the sheet into twelve wide columns, and finally divide each wide column into three narrow columns. Or you can buy sheets with columns already marked. They are obtainable at a Office Depot or Staples and are known as accountants work sheets or ruled columnar sheets.

Here is a link to an online cashflow worksheet:

Label the columns as indicated in the sample, one wide column for each month, and the first narrow column for the same month a year earlier, the second for this year’s estimate, the third ( to be filled in later) for this year’s actual figures.

The cash forecast, in its simplest form, is going to allow you to look into the future at the upcoming months and make estimates about each one:

• How much cash you will have on hand at the beginning of the month
• How much money you will take in during the month
• How much you will spend
• How much you will have at the end of the month

How detailed you make those estimates is up to you. The number of categories used in the sample cash forecast has proved about right for many people. But yours can have either more or less, depending on your needs. Here is a warning, however. Get started… don’t try for too much detail in the beginning. A simple worksheet which is used and maintained is better than one full of details that is not used.

The next step is to label the horizontal spaces in the left-hand margin. The top line should be Cash on hand and in checking account, end of previous period. That shows what you start each month with. On the next lines list receipts during the month including all cash coming in, paycheck, money borrowed, gifts, and so on. The total of all the first few lines, then, will give you all the money available during that month.

The next section covers fixed payments, the ones you can positively expect to be a certain amount. They will include rent or payments on the mortgage, various insurance premiums, regular savings, and so on.

Then come variable payments, the ones you know are coming but can’t tell exactly in what amount. They will be bills for telephone, cable bill, cellphone, electric, gas, food, clothing, and so on. In this section, inevitably, there will be a large sum of money spent but not easily accounted for. It will include all kinds of payments and incidentals too numerous and bothersome to record. This item is probably going to look pretty big but don’t worry about it and don’t try to break it down at least not at first. You will only involve yourself in needless paper work. Label it Other.

Here also leave a few lines for large nonrecurring payments such as Christmas bills, vacations, out-of-town trips, and so on. If you threw these into the Other category, it would distort it and make it jump around from month to month. You want it to be stable so you can estimate it accurately.

Now come the critical spaces. Devote the bottom of the sheet to a recapitulation. Label one line Total cash available, the next, Total payments, the last Cash balance, end of period. That, of course, will be the amount with which you will head the column for the next month.

Your blank cash forecast is now ready and you can start entering figures. If you have never done it before this is going to be very revealing. Before you start, here is a trick that is strongly recommended. Use three differently colored pencils: red, green and blue. Red will always be used for last year’s figures. Green will be used for future estimates. Then blue will be used later for actual results.

The way to start is to get out your checkbook stubs and receipted bills for the past twelve months and whatever other financial records you keep. Start with whatever month it happens to be when you read this. If it is June, all right, start with your records for last June and enter them in red. Probably you won’t have accurate figures for every category for last June but fill in every category anyway, guessing where you have to. Your check stubs should give you most of the data you need.

This is the time to take up your green pencil and begin making estimates for this month. You know how much you had at the beginning of the month, so enter that. You also know what the monthly paycheck is and you can figure the fixed expenses. The variable expenses you can’t know but here is where last year’s figures come in handy. If you don’t know the size of the electric bill you’ll get this month, just assume it’s going to be the same as the one you got a year ago. When it comes in you can pay it and then enter the correct amount in blue under Actual. And that will give you help in making the estimate for next month.

Don’t stop now, however. Still going through your old check stubs, fill in the red figures for the other eleven months. All twelve months will then have a column of red figures filled in. Next, begin filling in the rest of the green estimates. Keep in mind that they are only estimates so don’t rack your brains too fiercely. And by all means resist the temptation to decide right now that you are going to change your normal pattern of spending. This is a forecast, not a New Year’s resolution. You are trying to make a hardheaded judgment on what lies ahead.

As you go forward in your estimate, you will spot in such upcoming items as mortgage payments, insurance premiums, tax bills, Christmas spending. Each month you should have about the same big Other item. And you will be able to see pretty clearly how much cash you will have on hand at the beginning and end of each period. The average of these two figures for any month is your average working capital. If it is under $100, it is probably too low.

Here are a few tips that will make record keeping easy in the future. When you come home from a shopping, throw store receipts for cash payments into a box. Collect them and total them up at the end of the month… doing this daily is even better. Pay by check whenever you can. Make sure all family income goes first into the checking account, then out into other channels by check. Eliminate the use of credit cards.

This link to an online cashflow worksheet which is slightly different that what has been described above. It is based on a Zero-Based system Dave Ramsey teaches where you spend where every dollar every month and it fits in a category… the balance is zero at the end of the month. This is the method we use in our household and it works great.

We have previously discussed how family finances hold the same qualities of a small business. But all too often their finances run on a hit-or-miss basis. The hit-or-miss family, Mr. and Mrs. NoClue, always argue about money, because their priorities are wrong, they have let their money waste away on less essential stuff bought on impulse. Mr. NoClue gets a good salary, but tries to run the house on too little working capital. This causes him to worry and fight with Mrs. NoClue and snap at the children. Often he has to borrow on his credit card or at the payday loan place to tide the family over a crisis, and this causes unnecessary fees and interest.

Mrs. NoClue sees plenty of bargains in clothes and appliances, but seldom takes advantage of them because she knows has a rough estimate of what items she is going to need and when. Over time necessity forces her to buy in a hurry without much chance to shop around and take advantage of the previous bargains.

Mr. NoClue always thinks things are going to be better next month, and this causes him to buy things with future money or start an investment program only to be forced to give up. The last time he bought stock was not long before he needed some money for an emergency, but he did not have an emergency fund in place. Unfortunately, at that particular time the market was down. He had to sell, although if he could have held on he would eventually have had a nice profit.

Several times the NoClue’s have gotten a little ahead and bought a CD only to have to cash it within a few months. The penalty for early withdrawal wiped out any profit they would have received had they held on for the year. Again, operating money without a plan.

It is not hard to see that a little financial planning would do the NoClue’s a world of good. Maybe it would do your family some good, too. Are you game? If so, here is the way to start. It is not as complicated as it may seem.

The theory is very simple. You are going to make one chart to keep track of your net worth. Your net worth, of course, is the value of your major assets, such as savings, stocks, bonds, real estate, etc., minus your debts. If you are getting anywhere, your net worth should be increasing a little bit each month. Your net worth chart is going to show you how much.

Watching your net worth grow each month is a great motivator. Stop what you are doing right now and start creating your net worth statement. Here is a link to a google doc template for tracking net worth – colorful!

Another chart is the cash flow forecast. It will show you how the cash is going to flow through the family coffers during the coming year, with no regard to whether it goes toward increasing your net worth. It may show that in certain months January you will be pinched and that in others you will be loaded with cash. But in the latter case it may be cash that will be sorely needed for heavy obligations later on.

Did you know that if your are the head of a family, you are a businessperson… we talked about it in the 2.5 million piece, it is part of learning how money works. You see a family possess all the elements of a business. It makes and sells something – usually in the form of the services of the breadwinner(s). The “family” business begins in income, has expenses, carries overhead, invested capital, working capital and surplus (sometimes).

This may not be the way you have ever looked at a family, with all of the wealth of relationships which go beyond material or financial items. Like it of not it is a reality – any family makes up to form of small business.

Truth is running a business may be easier than operating a family. A family can “get by” and at times even prosper with bad systems that would push a business to the wall. The family carries more flexibility. For this reason it is really not necessary for a family to manage its business practices as carefully as a regular business must. But it is desirable. It is a way of getting along better, and making the available family money go farther.

Over the next few days we will look at how any family can stretch their money and make it do more. The methods are essentially business methods. Some may be too complex for the average family or unsuited to the nature of the family. In this case, the full dose of guidance may be cut to half a dose. The whole thing need not be swallowed, but it would do no harm to swallow a little bit of it.

Young couples, especially, face the problem of learning how to finance a family. Eventually they learn it, usually by trial and error with a good dose of pain thrown in. When young couples get to be older couples, they think of the past of how much better off they would have been if they had followed certain stricter financial controls in their younger years. That’s the benefit of hindsight.

It is true not every businessmen runs their family affairs on a “businesslike basis.” They may be crack administrators at the office, but they often are loose with the personal and family budget.

As a first step, take a look at the way a business is run. It must make a profit or die – a family must learn to live within their means and not on credit. At the beginning of each year a business estimates its gross income, expenses and net profits, and then plans on how to use the profit most effectively. Month by month during the year, the businessman eagerly compares his accomplishments with his forecast. If he is doing better than expected, he may expand; if worse, he may have to trim his sails and set a new course. But at all times he knows where he is and what he is aiming for.

• Do You know the state of your “Family Business?”
• Do You make “profit” or live in credit.
• Study business, make a budget and begin to manage your finances like a business – it will change your life.

Money is funny stuff. Money… is all around us; we earn and spend great amounts of it. A $60,000 salary over a lifetime will generate over two and a half million dollars. Yet many people, after working hard for forty-five years, end up with little more than their personal possessions, a car and a house with a mortgage. Hopefully after 45 years the house has been paid off!

The trick with money is to grab hold of a little of it as goes by and put it to work. The old-time miller use to set up his mill near a fast flowing stream. He could not stop nor wanted to stop the water. He just slowed it down so would a little, enough to turn his wheel. The goal throughout life is to find ways for controlling the flow of money through the family pocketbook, for diverting a part of it and putting it to work. That little steady drip, drip, drip, if properly handled, can swell to a modest fortune over the years.

Learn From The Miller

However, before the miller could make things happen he had to construct a dam, a canal, a gate and a wheel. Even after getting everything assembled he he had to keep a watchful eye on the flow of the stream and the mill race. In the same manner the handling of money requires time and attention to get results. Money will not behave on its own. If allowed to run its own path it simply goes down the drain. You need to set up and install some “machinery” to control it and then take time each month studying its behavior.

Nobody should be ashamed of spending the time required to understand money and the flow of their finances. It is true, the love of money has been claimed and slandered to be the root of all evil, portrayed by cartoonists and in the game Monopoly as a fat cat millionaire in a top hat and fur coat. Young people like to say there are more important things than money and that is very true. But, money can also be converted into many good and wonderful things; a house in the suburbs, a college education, a needed operation, a vacation, a trip back home, given to the church, helping someone in need, peace of mind for old age. If those items are worth striving for, then so is money.

Efficient Money Use and Financial Perspective

One of the first things required is to understand how to use money efficiently and how to get perspective on your finances. This will help you in your quest to capture some of the stuff (monwy) each month and put it to work. If you are fortunate enough to be doing this already, good for you. But it never hurts to go back and review what you are doing and see where things can be improved and get some new ideas.

Protection, security, emergency or rainy day fund to handle a financial emergency is just about as important as money management, so that should be a top priority. Before even considering buying stocks, mutual funds or a house, a family should make itself reasonably secure against the possibility of sudden death of the breadwinner, loss of his job or an expensive illness or injury. With proper planning such protection is not too expensive. Funds in a budget needs to be earmarked for life insurance, health insurance and methods of setting aside cash reserves in a safe place. These safe places are generally banks and money-market accounts.