Beating Broke

Personal Finance from the Broke Perspective

Dow Drops 504 – Now What?

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The Dow dropped by nearly 504 points (503.99) yesterday.  Now what?  Don’t panic.  As the bells start ringing to open the markets again today, they will likely slip even further.  Don’t panic.  There’s a silver lining to this.

I’m an optimist.  The glass is always half-full.  The silver lining here is actually a benefit of Dollar-Cost Averaging.  If you don’t know what that is, you’ll pick up a little bit in this post, but it’s a good time to subscribe to this site as we’ll be discussing DCA a little bit further later this month.

As everyone knows, if you want to make money in the stock market, you have to buy low and sell high.  A lot of money can be made if only you can do that.  Most of us don’t have the crystal ball to do it perfectly though.  Let me help you out.  Buy now.

When you see a headline like the one above, it’s a pretty safe bet that it won’t get much lower.  And if it does?  Dollar-Cost Average to the rescue.  And in the long run, the market will come back up, and you won’t even need another dot-com bubble to make yourself a safe full of money.

So what if the Dow drops more than it has in 7 years?  Buying at a low like this can only help your Dollar-Cost Averaged prices.  And if it gets lower?  Buy more.  Pretty simple really.

The people in charge here at Beating Broke are not financial professionals.  Please don’t take our advice for gospel.  If you are going to follow the advice here, please consult a financial professional first.  And, just for the record, nothing is a sure thing in investments.  So if you lose all your money, don’t come crying to us.  And don’t sue us either.

Feds Take Over Freddie and Fannie

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Mortgage giants Freddie Mac and Fannie Mae will be placed into a conservator-ship by the Feds.

The plan, which was delivered by Treasury Secretary Henry Paulson and James Lockhart, director of the Office of Federal Housing Enterprise, places the twin mortgage buyers into “conservatorship” to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

“We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection,” Paulson said.

Both Executives have been demoted and replaced.

Yet another in a long line of Fed takeovers.  And, unfortunately, another blow to an already weak economy.  Freddie and Fannie aren’t going under, but a takeover certainly shows their weakness and what could have been an impending failure.

I still don’t think that there is anything to worry about and we’re not headed into another great depression or anything.  What we all need to realize is that in the last 5-10 years, there were a lot of really stupid loans being made (and taken) on homes.  It created the housing bubble, and that bubble is still bursting.  In the end, there will be a huge number of foreclosures and a serious cutback on new home building.  But the thing to realize is that there are plenty of people that have the money to buy those foreclosures and resell them.  Eventually, the market will come back around, we just have to get past the aftershocks of the bubble burst.

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.