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Why You Need $300 Emergency Fund

Joseph lives paycheck to paycheck.  His job at the supermarket barely pays enough to keep a roof over his head.  When our Bank On classes mentioned the need for emergency savings, he was the first to raise his hand and challenge the idea since there is virtually no money TO save.  Having a big emergency fund is great, and can protect you in the event of a job loss or some larger emergency, but the average emergency is in the area of $300 - $500.  That is just enough to make ends not meet for the month. 

Without an emergency fund, when Joseph encounters an unexpected expense like a flat tire or a doctors visit, he will have to use other sources to fund that need. Alternatives to the emergency fund might include:

1. Credit Cards:  Many people use credit cards to fund the cost of unexpected expenses and make a plan to pay them off over time, but before they can get one emergency paid off, another happens.  The interest and the fees associated with the credit cards compound the cost of that unexpected expense. 
2. Payday Advances:  Some employers have been known to offer their employees a payday advance.  That can help meet that immediate need, but when payday comes, there will still be the regular bills to pay and now not enough payday to pay those regular bills so the cycle continues.
3. Payday Lenders:  For a small fee (about $15 - $20 per $100 borrowed) you can get a quick loan at the corner payday lender.  This like the payday advance will keep you in the cycle of debt as the loan comes due at the next payday cycle and that leaves little for you to meet your current needs.  Additionally, that annual percentage interest rate can be as much as 400% for that short loan you took out.  Where the lenders really make their money is when you renew your loan and pay another fee to extend your loan for a litte longer.  Both payday advances and payday loans do not report your payment to the credit bureau (except in circumstances of delinquency) so they don't help you build your credit.
4. Family/Friend Borrowing:  With family and friends, while they may be willing to help you in a pinch, you will find that they are not as accomodating when you are not able to repay on time.  This can damage relationships and make Thanksgiving very tense.
5. Charity:  There are charities to assist in a crisis, but the funds available from charity are minimal and they need to stretch their dollars over all the emergencies that come to their doors each month.  They may want to help you but not have the funds to give.

Our best defense is to give a priority to saving regularly.  If you can squeeze even a little into a savings account out of each payday and look to tax refunds and other windfalls to help boost that savings, you and Joseph can be in a better position when the next thing happens.  Things do happen to all of us don't they?

Adjusting Your W-4

Did you get a big tax refund?  Just a question.... do you still have some of it saved?  I love big refunds, but the problem is the money goes away so quickly.  One way you can make that money stretch all year long is to get a little each payday.  All you have to do is take a W-4 form to your Human Resources person and have them enter in the adjustment to your payroll. 

Which way do I adjust?
If you want MORE money each paycheck, you will want to INCREASE the number of exemptions on your W-4 form.  If you want LESS money in your paycheck (and more sent to taxes) DECREASE your exemptions. 

If you have multiple jobs or two spouses working, you may choose as few as ZERO exemptions to have more withheld from your paycheck to cover your tax bill.  If you got a refund and want more now throughout the year, you can raise your exemptions.  You can use the worksheet on the back of the form to help you get to the right number for you!

Payment Plans for Savings

Do you want to save more, but are having a hard time getting started?  Put yourself on a payment plan! Start by identifying what you are saving for.  Specify the amount and how long you are willing to wait for that item. 

Example: 
GOAL:  Emergency Savings of $300
TIME:  10 months
MONTHLY PAYMENT:  $30 each month or $15 each payday (300 / 10)


Are you saving for holiday
purchases?  Now is the time to get started if you haven't already. 

GOAL:  Holiday Spending (gifts, food, travel, decorations etc)  $500
TIME: 7 Months
MONTHLY PAYMENT: $71.43  (500 / 7)

Savings goals with timeframes allow you to break them down into attainable steps.  Try it for your goals!

Five Tips to Help You Pay Your Tax Bill

From IRS:

If you get a tax bill from the IRS, don’t ignore it. A delay may cost you more in the long run. The longer you wait the more interest and penalties you may have to pay. Here are five tips to help you avoid those extra charges:

1. Pay electronically.  Using an IRS electronic payment to pay your tax is quick, accurate and safe. You also get a record of your payment. Your options include:

• IRS Direct Pay
• Electronic Federal Tax Payment System
• Credit or debit card

Direct Pay and EFTPS are free services. If you pay by credit or debit card, the company that processes your payment will charge a fee.

2. Pay monthly if you can’t pay in full.  If you can’t pay all at once, apply for a payment plan. Most people and some small businesses can apply using the IRS Online Payment Agreement Application on IRS.gov. You can also apply for a plan using Form 9465, Installment Agreement Request. The best way to get the form is from the IRS.gov website. You can also call the IRS at 800-TAX-FORM (800-829-3676) to get it by mail.

3. Check out a direct debit pay plan.  A direct debit pay plan is the lower-cost hassle-free way to pay. The set-up fee is less than other plans – $52 instead of $120. With this type of plan, you pay each month automatically from your bank account. There are no reminder notices from IRS, no missed payments and no checks to write and mail. For more on these rules see the Payment Plans, Installment Agreements page on IRS.gov.

4. Consider an Offer in Compromise.  An Offer in Compromise allows you to settle your tax debt with the IRS for less than the full amount. An OIC may be an option if you can't pay your tax in full. It may also apply if full payment will create a financial hardship. To see if you may qualify and what a reasonable offer might be, use the IRS Offer in Compromise Pre-Qualifier Tool.

5. Pay by check or money order.  Make your check or money order payable to the U.S. Treasury. Be sure to include:

• Your name, address and daytime phone number
• Your Social Security number or employer ID number if business tax
• The tax period and related tax form, such as “2013 Form 1040”

Mail it to the address listed on your notice. Do not send cash in the mail.

Find out more about the IRS collection process on IRS.gov.

Test Your Credit Score Knowledge

Your credit score can affect many parts of your financial life. And while the large majority of consumers have basic knowledge about credit scores, there are a few knowledge gaps according to the Consumer Federation of America’s latest survey findings:

• Only 42 percent know that a credit score measures the risk of not repaying a loan rather than factors such as knowledge of, or attitude to, consumer credit.
• Only half of consumers (50%) understand the three instances when lenders who use generic credit scores are required to inform borrowers of the credit score used in the lending decision – after application for a mortgage loan, whenever an application for a consumer or mortgage loan is rejected, and whenever the best terms, including lowest interest rate available, are not offered on a consumer or mortgage loan.

To encourage more individuals to increase their credit score knowledge and complete the quiz at CreditScoreQuiz.org, Vantage Score and Consumer Federation of America (CFA) are offering those who complete the quiz the opportunity to enter a drawing for a $500 gift card. The 20 –question interactive quiz allows consumers to test their knowledge of credit scores and receive the correct responses with explanations. The quiz is available in both English and Spanish.

How Much Will You Need To Retire?

From Pension Benefit Guaranty Corporation.

The best time to start thinking about and saving for retirement is always right now.

While that's true for everyone, recently there's been a steady flow of stories about twenty and thirty-somethings to get them ready for life after work.

That's because the estimates for how much a 20-year-old needs to save go as high as $7 million.

For some, the enormity of the task has paralyzed them into inaction, while others view themselves as highly disciplined money managers - a trait discussed in a recent report by Time.

There are many in the financial planning community who advise starting a savings plan with at least 10 percent of your yearly income. But for a generation with competing financial concerns like rent, car payments, and student loans, it's too easy not to save now for a need that's decades away.

And for those over forty, with children to raise and older parents to care for, meeting saving goals can be just as challenging.

But no matter what your age, there are practical tools that can help define your retirement needs. For example, visit the Department of Labor's lifetime income calculator. For those of you with a 401(k)-type plan, the calculator will create an estimate of your monthly income based on your current account balance, and on the projected value of the account upon retirement age. Even for those without a 401(k), it is a good idea to start saving for retirement by putting money away each month into a savings account. The DOL calculator tool can give you a sense of how much you should put away so that you will have sufficient lifetime income after you retire.