Managing a Temporary Cash Crunch

Income shortages come in many ways. Some of them are long-term because of insufficient education, limited opportunities near home, or other reasons. Other income shortages are temporary in nature. Temporary income shortages happen for reasons such as a short-term lay-off, a health situation, or a temporary spike in expenses.

Here are several ways to manage a short-term cash crunch.

1. Emergency funds. Savings exist for short term income shortages. If you don’t already have an emergency fund, now is a good time to start. Start by saving $1,000 then build toward three to six months income.
2. Sell something. I recently spent time in our basement looking at things we no longer use. We have a crib and cradle we won’t use for a long time. They’re both in great shape, so we’ve considered keeping them for our grandkids. We’re not really attached to them though. If we were in a cash crunch, I’d use eBay, Craig’s List, a garage sale, or other mechanism to sell them.
3. Garage sale. My mom and her friends used to have a garage sale every spring. They’d sell books, clothes, furniture and baked goods. A garage sale can easily earn a few hundred dollars if you put up some fliers or posters beforehand.
4. Flip burgers. What I really mean is get a second job. Second jobs should be low stress, fairly mindless, and never interfere with your real job. Most people can’t sustain two jobs for an extended period of time, but if you’re looking to get through something temporary it is a great way to make a few hundred dollars a month.
5. Cut optional expenses. As we’ve talked about before, we’ve all got optional expenses. Some optional expenses can be cut or reduced easily. Sometimes you can trim an expense without actually cutting any service, like our cable bill.
6. Barter. Do you have a skill or time you could exchange for services you typically pay for? One of our readers, Broc K, recently shared how his wife offered to babysit in exchange for free music lessons for their girls.
7. Turn a hobby into a business. Are you a pianist? Piano lessons can fetch $10-20 per lesson. Growing up, my Dad broke colts for others and later taught me to use the same skill to earn a few hundred dollars a month. Most of us have a skill or hobby that could generate a bit of extra cash flow—use it.

How have you managed short-term income shortages?

Habits that Break the Bank

My kids have recently been on an anti-smoking campaign. When they see someone smoking on the street or in the car next to us the tell them something along the lines of "...if you smoke, you're going to die." My kids are young, so I'm ok with the directness of their message.

One day after they'd so tactfully told a stranger how smoking was going to kill them I got thinking about another big reason to not smoke. Smoking is an enormous budget killer.

I haven't been in the market for a pack of cigarettes for a long time, so did a little research. The cost of a pack of cigarettes in Utah is about $4.50. I had a tough time figuring out the average number of cigarettes someone smokes in a day, but found smokers posting online who said anywhere from 10-40. A pack a day (20) seemed to be a very common answer.

During my reading I ran across a forum on http://www.cigreviews.com/ talking about how much people are paying for cigarettes. My favorite quote from the forum is below.

"Sad as it is, I never buy cartons. I never have the damn money. I've bought them once or twice and I think they were about 40 bucks, but as far as packs go here they're about 4 and some change depending on what you buy."

Irony perhaps? Someone who smokes a pack of cigarettes a day is spending $135 per month on cigarettes. Imagine an extra $135 going into your retirement account each month. If someone took their $135 smoking habit and redirected it to retirement they'd have $201,000 in 30 years (assuming an 8-percent return on their investment).

A friend of mine who's wife quit smoking a year ago has been able to increase monthly savings by $500 per month just from not spending on cigarettes. She was a heavy smoker, but even for an average smoker the savings are great.

The costs of smoking aren't just the cigarettes themselves. Health care costs more, you age faster, your clothes wear out faster, your vehicles depreciate faster, etc. Smoking has many hidden costs. As you can see, even ignoring the hidden costs you'll end up far wealthier by not smoking than by smoking.

NOTE: My intent isn't to indict smoking, just to raise awareness about the long-term financial impact of seemingly small things. A cup of coffee from starbucks each day accomplishes the same thing.

Stop Reading and Sign-up

This post is for all of the soon to be college graduates and those who are starting a new job. On your first day at your new job you'll spend time filling out all sorts of paperwork. The most important one is probably your W-4, which your employer needs to pay you. The second most important? Some people might say your insurance forms, I'll go with signing up for your company 401k.

You can contribute up to $16,500 per year to your company 401k. Most employers also match your contributions to some degree. The average company contributes $0.50 for every $1.00 you contribute up to 6% of your income. Simply said, they're giving you a tax deferred (you don't pay taxes on it until retirement) 3% raise. Most financial advisors call the company match "Free Money".

Free money is one of the biggest reasons to sign up for your 401k on your first day on the job. Another big reason is that the earlier you save, the easier building wealth becomes.

Someone who contributes $2,000 per year to their 401k from 20-30 then leaves it alone to grow until they're 60 will have nearly $291,000 to help fund retirement. This person will only have saved $20,000 of their own money. All of the rest of the wealth will have grown from an 8-percent annual growth rate.

Someone who waits until they turn 30 to start saving can still save the same $291,000. However, they have to save a lot more and a lot longer. The 30 year old will have to save $2,600 per year from 30 to 60 at an 8-percent growth rate. The person who waited will have to save a total of $78,000. They'll still get most of their money from compound interest, but it'll be a lot more work.

All of you college graduates, start now. If you think you can save $5,000 per year, stretch to $6,000. If your employer is matching another $1,500 you'll have $7,500 per year going into your retirement plan. Using the same 8-percent return and saving that same $7,500 for 30 years, you'll have $850,000. Now we're building wealth!

If your employer has a 401k with a match, go sign up. Stop reading this post right now to go sign up. You'll start building wealth today!

Five Ways to Pay for College, If You Haven't Saved

Today's post is the final post of our series on saving for college. If you've missed the earlier posts, here they are.

• Ten things to do before saving for college
• Retire First, College Later
• Reasons to Save and Not to Save for College
• 529 Plans Debunked
• Five ways to pay for college if you haven't saved

Five Ways to Pay for College if You Haven't Saved

If your child is headed off to college this fall and you haven't saved, you still have several options. Each of these individually may not fund their entire education, but when used in conjunction are likely to get your child the education she needs to set out on an independent and successful life.

Apply for a federal grant. The difference between a grant and a loan, is you don't have to repay the grant. The US Government has several types of grants. The most common is a Pell Grant. The maximum amount for the 2009-10 school year is $5,550, which can make a big dent in tuition, fees, and books. If you are a Pell Grant recipient, you may also qualify for an Academic Competitiveness Grant, which adds another $750 to $1,300. You can read about and apply for grants on the Department of Education's site.

Get a summer job. Have your child get a job. They probably won't be able to save the entire amount, but a summer of $8 / hour will net around $3,000. You might even work out a deal where you match their savings to motivate them to save as much as possible.

Maximize then use your tax return for tuition. Once your child is in college, you or she will likely qualify for some tax advantages. The tax programs include the Hope and Lifetime Learning credits as well as some deductions. If your income is too high for one of the credits, you can probably still deduct tuition payments to reduce your tax bill. Use all or some of the credits and deductions to funnel money toward college. The IRS website gives more information about tax benefits of college.

Apply for a loan. A few options exist for borrowing for college. The federal government administers student loan programs that meet most student's needs. The biggest difference between the government's loans and grants is loans must be repaid. Available loans range from subsidized student loans to Plus loans where the parent is the person responsible for repayment. You apply for a federal loan using the same form as your Pell Grant. Some of the loans even have deferral options so you don't have to repay until your child is finished with college. You can read more about the options on the Department of Education's site.

Reduce college expenses. Reducing the tuition and fees for your child may be difficult if they are working toward a specialized degree. You can save a lot on college expenses though. Have your child live at home during college. Most areas of our country now provide access to remote learning where your young adult could take classes via the internet to get through their general education.

Another option for reducing expenses is to attend a cheaper school. In Utah, most kids want to attend the U of U or BYU. They are also two of the most expensive schools in Utah. A great way to get a degree from a top school and keep your expenses down is to attend a community college or smaller university for the first couple years. If you pursue this route, make sure credits will transfer to the school you plan to get your degree from.

It Is Achievable!

As you can see, if you're headed to college or have a child headed to college you can go even if you haven't saved. I know plenty of people who headed to college with little or no savings. They had a lot of encouragement and support from parents, were committed to getting an education, and found ways to leverage all of the options above to get through school. So can you!

Saving for College: 529 Plans Debunked

Today's post is a continuation on our college savings series. If you've missed the earlier posts, here they are.

• Ten things to do before saving for college
• Retire First, College Later
• Reasons to Save and Not to Save for College
• 529 Plans Debunked
• Five ways to pay for college if you haven't saved

529 Plans Debunked

The options for college saving are nearly as broad as opinions on the topic. The federal government and most state governments have made it easier for us to save now than in the past. One of the best options for college savings is the 529 plan.

529 plans are a relatively new savings option. They were introduced in 1996 and are named after the section of the internal revenue code which created the plans. They basically come in two forms.

1. Savings plan where you put money into the plan and choose an investment. Growth of your savings is based on the performance of your investment choices. Investment choices are simple, so you don't have to know how a lot to choose.
2. Prepaid plans allow you to purchase tuition credits at current tuition rates. The performance of your investment matches annual tuition increases.

529 plans are administered by each state. Every state now has at least one 529 plan. The plans vary widely from state to state. The variations include investment options, expenses, and tax deductibility of contributions.

The benefits of a 529 plan include:

• High contribution limits. You can contribute $300,000 plus per beneficiary, depending on the state plan you choose. All states are at least $300,000.
• Contributions and earnings remain owned and controlled by the 529 account owner.
• Contributions are tax deductable on state income taxes in many states.
• Money not used by the beneficiary can be transferred to other beneficiaries. For example, you could transfer leftover money from an older child to a younger sibling. You could save your investment beyond your kids and transfer it to a grandchild if you'd like.
• Any growth of your investment comes out federal tax free if used for a qualifying college expense.
• Investments are simple. In most state plans you choose a year your child will start college and the fund manager makes the investment more conservative each year. Your investment will move from highly stock based when your child is young to mostly bond and cash based as she gets close to going to college. You don't have to think about it.
• Limited impact on financial aid eligibility. 529 plan assets owned by a parent are listed as parental assets. Therefore, they have a minimal impact on eligibility for financial aid.
• You can continue contributing to a 529 beyond a beneficiary's 18th birthday.
• Tuition rates in many states are climbing 7-10 percent per year, which is a great return. If you are confident your child will attend a state university, this makes the prepaid plan a good option.

Disadvantages of 529 Plans

• Any withdrawal for non-college expenses will be taxed as regular income and assessed a 10-percent penalty.
• Funds not use for college are stuck in the plan unless you choose to pay taxes and a penalty.
• Account owner can only make changes to investments once per year. I don't consider this a disadvantage, but some of you might.
• Fund expenses (amount charged by the 529 plan manager) are higher than normal mutual funds. If your child is within a couple years of college, this is a big reason to not go with a 529.
• Prepaid tuition plans lock you into state owned universities and colleges.

If you choose a 529 as a college savings vehicle, you aren't locked into your state's plan. If your state doesn't offer an income tax deduction, then you should look at other plans. Utah's plan does offer a deduction and has among the lowest expenses, so I've chose to save in our plan.

Reasons to Save and Not to Save for College

Today's post is the third of our saving for college series. If you've missed any of the previous posts, here they are.

• Ten things to do before saving for college
• Retire First, College Later
• Reasons to Save and Not to Save for College
• 529 Plans Debunked
• Five ways to pay for college if you haven't saved

Reasons to Save and Not to Save for College

Saving for college is a very personal thing. It is tied closely to the goals you've set for yourself and the goals of your kids. With that in mind, here are a few reasons to save and a few reasons not to save for your kids' educations.

Four Reasons to Save for College

1. The median income for someone with a bachelor's degree is double that of someone with only a high school diplima. A recent study also found that the unemployment rate for those with a bachelor's degree is 1/3 that of those with only a high school diploma.
2. Happiness has a highly positive correlation to level of education. Studies have shown that those with graduate degrees tend to rate themselves happier than those who have limited or no college education.
3. Some kids need roadblocks removed to help them go to school. A friend of mine has a son who is very motivated and would have gone to school without help. He has another son who has very little scholastic motivation and needs the extra push. He chose to pay more for the second son to remove a reason / excuse not to attend college.
4. You have a goal to help your kids get an education. Some people value education enough to put it on their life goals list. I have a goal to help all four of our kids get a bachelor's degree. The help we'll offer will range from giving them the opportunity to live at home during college to a lot of encouragement and some tuition assistance. The motive is to help my kids have an education that creates options during their life and to limit need for ongoing economic help as adults.

Four Reasons Not to Save for College

1. You can't borrow for retirement, your kids can borrow for education. Saving for education over retirement is fiscally irresponsible. Your kids will end up helping you in retirement, which may set them back more than paying for their own education.
2. Your kids might appreciate their education more if they earn it themselves. My parents encouraged college from when I was very young. They always talked about where, not if I would go to college. They expected me to earn it and I value it deeply because I worked for it.
3. You can't predict how much your kids will need for education. They may earn scholarships or qualify for grants. Most college savings plans penalize withdrawals that are not for qualified educational expenses.
4. You might be in a position to pay as you go when your kids start college. Your income may have risen or you may be completely out of debt. If this is your preferred approach, then make sure you're working a plan to get there.

What are some of the reasons you have or haven't chosen to save for college?

Retire First, College Later

Today's post is part of our series on saving for your children's education. The topics we'll be covering are:

• Ten things to do before saving for college
• Retire First, College Later
• Reasons to Save and Not to Save for College
• 529 Plans Debunked
• Five ways to pay for college if you haven't saved

Retire First, College Later

We were recently out with some friends of ours and had a discussion about when to save for our kids' education. Some people start saving for college when their child is in the womb or earlier. In some cases that's a good plan, in others its not. My approach is to focus on our retirement needs before funding education for kids. We won't have access to loans in retirement. Our kids will be able to get a loan for school.

The question I ask myself before saving for college is whether we have saved enough to survive in retirement given a conservative growth rate? To answer this question, we turn to time value of money again. The financial calculator we've used in the past can help us decide if our current retirement savings will grow to enough to "get by" in retirement.

Plug the following information in the calculator.

1. Present Value (PV) = everything currently in your retirement accounts.
2. Rate (i)= a conservative number like 5 or 6-percent per year (this is the percentage you expect your savings to grow at)
3. Payment (PMT) = However much you are contributing to your retirement per year
4. Periods (n) = Number of years until retirement. We're trying to estimate a conservative worst case scenario here. In my case, I used 38 since that's when I'll be 70. Seventy seems like an old retirement age, but we're being conservative.
5. Future Value (FV) = blank (we're solving for this variable)
6. Click on "FV". The number in the FV field is how much your savings will grow to by the time you retire. It will show as a negative number, which is fine at this stage.

Knowing your total savings is a key step. Now you should determine if that savings will create enough annual income to survive.

1. Copy the FV amount into the PV field.
2. Leave Rate alone since it's a conservative number.
3. Change Periods to the number of years you expect to survive in retirement. My family has a history of passing in their 70s and a history of living into their 90s. We're being conservative, so I expect to live to 100.
4. Click on the PMT button.
5. You now know how much your current savings could give you in savings each year of retirement.

If you're close, but not quite there, play with the calculator. Insert a bigger payment (savings) amount you could continue saving while saving for college while doing the first calculation above. Could you shrink your current annual savings enough to start a college savings fund and still make your survival retirement goal?

If you've saved enough to achieve your "getting by" retirement, then take a look at "Ten Things to do Before Saving for College" as a guide to see if you're ready to start focusing on college.