Wednesday, October 20, 2010

Saving for a rainy day, part 2 of 2

If you have a job right now or have managed to get a job this year, first let me say WOOHOO!!! Things are very slowly turning around economy-wise in my area, and hopefully they are doing the same in yours. I'm always heartened when I hear of someone getting a job these days or when I see job postings on job boards, whether it's the AIA or someone else's listings. If you've managed to score or keep a job as an intern, it's probably a relief to you to finally have some cash coming in so you can move out of your parents' house, or get a better apartment, pay off some credit card bills and student loans, and maybe finally splurge on that new iPhone you've been craving since you got out of college last year and couldn't have because you could barely afford to put gas in the car. And good on you--enjoy that financial relief (and new iPhone), but spare a moment's thought for your future, both short-term and long-term.

Over the past two years, my office cut my (and all my remaining coworkers') hours and pay by 10%, and we lost some other benefits as well (though our healthcare coverage remained, the costs went up). Making ends meet was a struggle, but my husband and I got through in pretty good shape and with fewer bouts of insomnia than many others in this economy. When the economy first started sliding big-time in early September of 2008 and the first round of layoffs hit my office, the hubby and I immediately cut back on our 401(k) contributions for several months so that we could stockpile easily-accessible cash into online savings accounts (which tend to have better interest rates than bricks-and-mortar banks). After we stockpiled between us six months' worth of mortgage payments on our condo, we went back to our normal levels of 401(k) contributions. At the same time, we figured out ways to cut our expenses and decided to forego a few of our usual trips and splurges. Now on the seemingly-other side of the Great Recession, we find ourselves with a nice chunk of savings to build on or use, but had one of us been laid off, we could have paid the mortgage for six months without ever having to use our unemployment to do so.

When I first began my architectural career in 2000, it used to annoy me to no end to have someone tell me to put money into my 401(k) and to chuck a little of my meager paycheck each month into an emergency savings account. Hell, I wasn't making that much in the first place, and now you want me to not have access to even more of it?! But thinking through the rainy-day point of view began to make more sense. First of all, saving for retirement was really easy for three reasons:

a) they take the money out of my paycheck before it ever gets to me, so it's not like I ever had it to miss in the first place;

b) my company matches up to a certain percent, so even if the market is crap, I put in that percentage that they match and doubled my money (and everything I put in over that matching percentage helps too, because;

c) the younger you are when you start to save for retirement, the better off you are because overall, time is on your side (investments with Bernie Madoff notwithstanding).

But saving for the short term, the rainy-day/emergency fund, is a really good idea for those just starting out. It is precisely because you don't have a lot of extra cash lying around that makes the emergency fund so important. A couple of years ago, I sprained my ankle really badly and had to go to the emergency room. Even though I had good health insurance that paid for everything I had done that day, there was still a $100 copay to get in the door of the ED. That's a big chunk of cash to drop, especially if you're just starting out and aren't making a lot. Having a little saved up can make surprise expenses--car repair, emergency room visit, trip home for a funeral, vet bill for a pet--easier to swallow.

So how much to save? I've seen different estimates on this, depending on the financial guru. The supposed "rule" is that you should have three to six months' worth of living expenses saved, but depending on your situation you could get by with more or less. I'd say aim for one month's worth of expenses saved up and go from there. And if you're paying off student loans and credit cards while all this is going on? Just get into the habit--even putting aside $20 per paycheck can help. Think about it: if you get paid every two weeks, you can save up $100--my emergency room copay--in two and a half months. That might seem like a long time, but it's a longer time if you have to put yet another surprise expense on a credit card and then pay it off at 19%.

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