Beating Broke

Personal Finance from the Broke Perspective

Good PF Books for Wedding Gifts?

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My brother is currently scheduled to get himself married in the middle part of next month.  As a result, I’ve spent an ungodly amount of money on plane tickets, hotel and rental cars for the event.  Added to that will be food for a few days for all three of us (Me, My Wife and Our Son), a Tux rental, and who knows what other stuff.  My brother lives in Anaheim (thank goodness it isn’t a New York wedding!), and apparently, there is a mutant giant mouse that runs rampant around those parts and must be seen by anyone under the age of about 100.

In any case, despite the rampant fiscal spending of the trip, I thought I might pass along a few of the personal finance books that I’ve found useful in our married life.  That is a pretty short list, but a distinguished one.  Dave Ramsey’s Total Money Makeover, Is top of the list. I might throw inThe Millionaire Next Door as well. But those are about the limit of the books that both my wife and I found to be useful. I’ve read a few others that were somewhat informative to me, but I’m trying to find books that are specific to couples.

A quick search of Amazon finds a few others like one by David Bach called Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partner, and Larry Burkett’s Complete Financial Guide for Young Couples: A Lifetime Approach to Spending, Saving and Investing. I’ve never read either, so don’t know if they are worth the time or not.  That’s where you all come in.

Do you and your partner have a book that was important to your finances?  Something that made the transition to couples money management a little bit easier?  Let us all know in the comments.  I’ll try and get a list together and share it all with everyone a little later this month.

Dollar-Cost Averaging

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Let me start by saying that investing is risky business.  You should consult a professional for professional advice before doing any investing.  I’m a hobbyist, not a professional.

What exactly is dollar-cost averaging?

Dollar-cost averaging is a method of long-term investing.  By buying stocks in smaller chunks over time, the amount you pay for the stocks will balance itself out to an average.  So, in an example, if you were to buy 1 share of Microsoft for $50, then another share for $40, your dollar-cost average price per share would be $45.  So if the shares go back up to $50, you would be making money by selling.  Obviously, this is normally on a much larger scale.  Think 10s, 100s and 1000s of shares.

Another example.  If I buy 50 shares of Microsoft stock at $50 and then the stock market tanks.  Suddenly, my 50 shares of MSFT are only worth $25 each.  That hurts.  The stock is still strong, but the market is poor.  I decide to buy more.  This time, I can buy 100 shares for the same amount as before.  Now, I own 150 shares of Microsoft and my total cost is 50@$50 and 100@$25.  My cost per share is dollar-cost averaged down to $33.33 each.  The stock only has to gain $8 for me to break even, and anything beyond that is gains. (note that I’m not including anything as far as fees.  Those will vary)

In troubled economic times, many people often overlook the benefits of dollar-cost averaging and participate in the mass hysteria.  If, instead, investors would take advantage of the opportunity, they could find themselves the recipients of a handsome profit when the market returns to it’s normal levels.  That, of course, is if it returns to it’s normal levels.  Which it most likely will.

How Much Should Your Emergency Fund Be?

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If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund.  But just how much do you have in your emergency fund?  And how much should you have in that fund?

Ramseyan thought:  Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses.  This is the current plan that my wife and I are using.  We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings.  It’s just under $1050 at the moment and growing at about $2-$3 a month.  Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking.  Many people, my wife and I included, couldn’t even make it a month on $1000.  Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum.  They may be right.

The key here, is that we’re discussing personal finances.  It’s personal.  When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all.  We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole.  We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate.  Certain things will raise the risk of an emergency.  If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car.  If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be.  I suggest starting with at least $1000.  It’s a good number, and for many, it’s more than what you already have.  If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so.  Continue to build it until it is at least 3 months expenses.  In the end, shoot for a constant emergency fund of at least 6 months expenses.  Try to keep it to no more than 12 months though.

Why no more than 12 months?  Because you’re likely keeping it in a high-yield savings.  The 3-4% that they are currently paying is good, but you can do better elsewhere.  If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return.  Presumably anyways.  History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund.  If you don’t then this whole article is pointless.  It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional.  Before making any big money moves, you should consult a professional.