A rainy day fund is different from an emergency fund–but it is still incredibly helpful for your peace of mind.
A rainy day fund is used for those relatively small and somewhat expected expenses that happen, but you can’t necessarily count on the timing. Imagine that your everyday life is a series of sunny days where you go about your daily life following your routine. Rainy days happen now and then and may disrupt your routine. Sometimes the disruption is welcome; sometimes, it isn’t.
Here are some examples of when you might use your rainy day fund.
Depending on your age and stage of life, you probably find that certain events happen in clusters. Weddings, births, graduations–etc. You know that these events may be coming, but you don’t know when. Travel for these events can be expensive depending on when and where they are. And then there’s the cost of gifts. These would be appropriate expenses for the rainy day fund.
Let’s say you have children, and they are on school break. And, you literally have a rainy day–or worse, a string of rainy days. This is when you dip into the rainy day fund and plan an event. It could be a short trip, an educational experience, or just rain boots and raincoats so you can all go out and play in the rain.
Other examples of uses for rainy day funds would be medical co-pays or coinsurance payments and veterinary bills for regular checkups. You might also use the fund for the replacement or repair of small electronic devices, sports equipment, minor car repairs, and home maintenance expenses.
A rainy day fund differs from your emergency fund. Emergency funds are used to help cover large, unexpected expenses like major car repairs, major home repairs or large medical bills. The rainy day fund is used for smaller expenses that you know you are likely to incur, but you don’t know the timing, and you don’t know exactly how much they will be.
So, how much should you keep in your rainy day fund? As usual, with financial questions, it depends. If you have a large family, including your pets, then you’ll want to add more to your rainy day fund to help with those insurance co-pays and vet bills. If you and your household depend on electronic devices(don’t we all?), then you’ll want to add more to your rainy day fund as well. Take a look at what could happen in the next year to help you determine an amount. How old are your cell phones? How likely is it that you’ll need to replace them this year? How about iPads and other devices? What about small home appliances like coffee makers and toaster ovens/air fryers/etc., that you depend on? How much is the deductible on your car insurance? This is the amount that will come out of your pocket if there is an event involving your car. How about the kid’s activity levels? Will their activities likely lead to expenses like new sports equipment (or medical co-pays)?
The rainy day fund, like the emergency fund, helps with peace of mind. You can design your spending plan and account for all of the regular expenses.
However, everyone experiences unplanned–though
not necessarily unexpected–expenses from time to time. Your rainy day fund can help you cover those expenses without derailing the rest of your financial plan.
This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.
By now, you’ve undoubtedly heard that “the Fed” has been raising interest rates to rein in inflation. Interest rates are an essential part of our economy, and their impact can be felt by nearly everyone who participates in financial activities. The federal reserve raises interest rates to restrict access to funds and hopefully slow down the rate of increase of prices, including wages, in the economy. While this sounds like an awful idea if you are a borrower or have used access to cheap money to grow your business, higher interest rates can positively affect savers and lenders. If you are a saver, higher interest rates mean you can earn more money on your savings. This can be really helpful if you are saving for a specific goal, such as buying a house, starting a business, or saving for retirement. With higher interest rates, your savings will grow at a faster rate, allowing you to reach your financial goals sooner. Another advantage of higher interest rates for savers is that they can help to combat inflation. Inflation is the rise in the cost of goods and services over time, and it can erode the value of your savings. In other words, if the prices of the goods you buy rise faster than the value of your savings, your savings can’t buy as many goods. However, if you are earning a higher interest rate on your savings, you can offset the effects of inflation and maintain the purchasing power of your money. For lenders, higher interest rates mean that they can earn more money on the loans they provide. This can be particularly beneficial for banks and other financial institutions that make a significant portion of their revenue from interest on loans. Higher interest rates can also encourage more lending, as lenders are more likely to provide loans when they can earn a higher return on their investment. And, when you purchase a bond, whether a government bond or corporate bond, you also become a lender and can benefit from higher interest rates. Retirees and others who live on fixed incomes are often savers and lenders—a large part of their income is often the interest generated from savings deposits and bond interest. After nearly a decade of extremely low interest rates, these new higher interest rates are a real boon to those living on fixed incomes. Another advantage of higher interest rates for lenders is that they can help to stabilize the economy. When interest rates are low, borrowing becomes cheaper, and consumers and businesses are more likely to take on debt. However, this can lead to an increase in inflation and a potential economic bubble, and in some cases, poor management decisions. Low interest rates can allow a company which is either poorly run or may not have an economically feasible business model to continue operations simply by borrowing cheap money. By raising interest rates, lenders can discourage excessive borrowing and prevent an economic crisis. Higher interest rates will have a different effect on savers and lenders versus borrowers. Savers can earn more money on their savings, combat inflation, and reach their financial goals faster. Lenders can earn more money on loans, stabilize the economy, and prevent potential economic crises. While borrowers may have to curtail spending in order to accommodate the higher cost associated with borrowing. While there may be some drawbacks to higher interest rates, the benefits for savers and lenders are significant.
Note on on blog posts and newsletters: When we work together, we examine your particular financial picture and your particular goals. Blog posts and newsletter articles are not individualized advice. They are intended to be thought-provoking and to surface discussion topics for your financial planning. If you have questions about your financial plan, feel free to schedule a meeting. Your first meeting is complimentary.
While higher interest rates can be beneficial for savers and lenders, as we discussed in our last post, there are also several drawbacks to consider. In this blog post, we will explore some of the potential disadvantages of higher interest rates.
One of the most significant impacts of higher interest rates is that they can lead to increased borrowing costs for consumers and businesses. When interest rates rise, it becomes more expensive to borrow money, which can reduce consumer spending and business investment. This can lead to decreased economic growth, as businesses are less likely to expand and hire new employees. In fact, the employment numbers and wage levels are key economic indicators the Federal Reserve is using to determine when and the degree to which they should raise rates.
Higher interest rates can also have a negative impact on the housing market. When interest rates are high, fewer people can afford to buy homes, which can lead to a decrease in demand and a drop in housing prices. This can be particularly problematic for homeowners who are looking to sell their homes for those who are in the process of buying a home. In some cases, it leads to consumers feeling “trapped” in their current homes because they currently have low fixed mortgage rates. Because mortgage rates are so much higher than they were just a few years ago, taking out a loan of the same size as the original loan to buy a new house can lead to a drastically higher mortgage payment.
Another potential drawback of higher interest rates is that they can lead to a decrease in the stock market. When interest rates rise, investors may sell their stocks and invest in safer, fixed-income securities such as bonds. This can cause a decrease in demand for stocks, which can lead to a decrease in stock prices. In addition, higher interest rates increase the price that businesses pay to borrow. Businesses that rely on cheap money (low-interest rates for borrowing), they may be unable to sustain the growth that they’ve had. And in some cases, a company may not be able to continue operations if the money it borrowed was subject to floating or variable interest rates and the payments have now simply become too large for the company to continue making payments.
Higher interest rates can also lead to an increase in the value of the currency. When interest rates rise, foreign investors may be attracted to invest in the country, which can cause an increase in the demand for the currency. While this may seem like a positive outcome, it can also make exports more expensive, which can harm businesses that rely on international trade.
Finally, higher interest rates can lead to an increase in the national debt. When interest rates rise, it becomes more expensive for the government to borrow money, which can lead to an increase in the national debt. This can have long-term consequences for the country’s financial health and can lead to a decrease in government spending on programs, including healthcare and education.
While higher interest rates can have benefits for savers and lenders, they also have several drawbacks to consider. These include increased borrowing costs for consumers and businesses, a negative impact on the housing market, a decrease in the stock market, an increase in the value of the currency, and an increase in the national debt. When considering the impact of higher interest rates, it is important to weigh both the potential benefits and drawbacks before making any financial decisions.
Note on blog posts and newsletters: When we work together, we examine your particular financial picture and your particular goals. Blog posts and newsletter articles are not individualized advice. They are intended to be thought-provoking and to surface discussion topics for your financial planning. If you have questions about your financial plan, feel free to schedule a meeting. Your first meeting is complimentary.
Interest rates and economic cycles–What’s in it for you? Economic cycles are characterized by alternating periods of expansion and contraction in the economy. These economic cycles can have an impact on interest rates, and, in many cases, the level of interest rates affects economic cycles. Right now, the federal reserve and other central banks have been raising interest rates in order to increase the cost of borrowing and hopefully slow down an overheating economy. As we discussed in our last two blog posts, there are benefits and drawbacks to individual consumers and businesses of these higher interest rates. Today, we’re going to look at how you, as a consumer, can set yourself up to take advantage of both high and low-interest rates. Not too long ago, interest rates were low–very low. If you purchased a home with a fixed-rate mortgage or perhaps refinanced a fixed-rate mortgage during this period, you might have borrowed at rates around 3%. Now, you can get 4% on your money just by leaving it in a savings account. And, after a year when the S&P 500 dropped about 20%, a 4% return sounds lovely. During those years of low-interest rates, finding places to get a decent return on your money with relatively low risk was difficult. When investing, we look for an appropriate risk-adjusted return; in other words, we expect a higher return if we take on more risk. Interest rates were so low that many savers became investors simply because they couldn’t get a decent return on their money by saving and lending. They had to take on more risk to get a decent return. And fortunately for them, we experienced the longest bull market in history from 2009-2020. With higher interest rates, you have to do more of a balancing act between investing in equities like stocks or lending like purchasing bonds or other debt instruments. In an ideal situation, you would have funds to deploy in each case as soon as the balance shifted such that your comfort level (your risk tolerance) could be met and your desired level of return could be achieved. However, we don’t have crystal balls and don’t know if any given economic event is a blip or the beginning of a new trend. As interest rates have increased over the last year, we’ve never known if we have already hit the top. If we’re at the top of the curve, then, as a lender or saver, you would want to lock in return for as long as you can. On the other hand, if you lock in and then interest rates rise again the following week, you may be kicking yourself. Or, if you recognized that mortgage rates were at their lowest in 2020, you could have locked in a nice, low cost of borrowing for 30 years. At the same time, if you believe that we’re at the top of the curve, you also have to think about how long you think interest rates will be high. If you believe that interest rates will start dropping in the near future, then you may want to start investing again on the theory that easier money conditions will allow for accelerated business growth. The point here is that it is important to consider how economic cycles affect your individual financial situation. The “set it and forget it” method of financial planning may look like it works out for some folks. And, perhaps from a behavioral economic perspective, it has worked i.e.-they didn’t withdraw from their 401k because they weren’t thinking about their 401k. But, with a little attention, they may have been able to either reduce the risk in their portfolio or increase the return. Borrowing when the cost of borrowing is low–such as taking out or refinancing a mortgage–and lending when interest rates are high–such as purchasing treasuries and other bonds–is one method of taking advantage of the interest rates as we go through economic cycles. Setting yourself up to make the most of interest rate changes is just one strategy you can use to reach your financial goals. Increasing or decreasing interest rates isn’t bad or good without context. It does come down to how you take advantage of them.
Note on blog posts and newsletters:When we work together, we examine your financial picture and goals. Blog posts and newsletter articles are not individualized advice. They are intended to be thought-provoking and to surface discussion topics for your financial planning. If you have questions about your financial plan, feel free to schedule a meeting. Your first meeting is complimentary.
What is the purpose of these publications? They aim to get readers to buy them or click on a headline.
Do they have any skin in the game regarding your student’s success? Absolutely not.
Here are some of the criteria the ranking magazine editions use:
Average six-year graduation rate
Faculty compensation
Student-Faculty ratio
Percent of Full-time and Part-time faculty with a terminal degree in their field
Cutting edge facilities
Average SAT scores
The first factor can give you an idea of how well the school retains its students until graduation. On the other hand, if you think you can only afford four years of undergraduate education, this statistic isn’t very helpful.
I suppose that faculty compensation may give you an idea of how highly the school values its faculty. It does not give you an idea of how the school values its student body. And in my discussions with faculty, they often cite other benefits such as access to research facilities and resources and colleagues and the caliber of the students rather than paychecks as the reason they stay with a particular university – not to mention tenure.
Student-to-faculty can be a measure of the number of professionals focused on your student in high school, where the sole purpose of an institution is to educate its students. However, in a university setting, the education of the students is not the sole purpose of each of those faculty members. Many of them are focused on research and may teach as few as a single class per semester, and teaching assistants may actually run those classes.
Certainly, you want your students’ professors and instructors to be well-informed and up-to-date on developments in their fields. However, what if your student is pursuing a degree in Artificial Intelligence? It is a relatively new field. And there are now quite a few schools with programs focused on artificial intelligence. But how many people with terminal degrees in Artificial Intelligence have decided to enter academia rather than the private sector? Or, let’s assume that the rankings consider a terminal degree in computer science sufficient to be a terminal degree for artificial intelligence programs. How many of those computer science professors have focused on artificial intelligence, machine learning, data analysis associated with machine learning, the legal and ethical ramifications of artificial intelligence, and the behavioral psychology and biases associated with artificial intelligence algorithms versus aspects of computer science that have been the bedrock of the computer science or applied math field for decades?
Or, have you ever taken a class where you’ve been quite sure that the professor has no real-world experience where real-world experience is critical? Research studies and experiments, and their published analyses, may not give students what they need to function in the real world. However, the magazine ranking algorithms don’t give weight to accomplishments or experience outside of academia.
There are at least a couple of factors to consider about cutting-edge facilities on a college campus. While some schools will tout their commitment to a particular field with a new shiny building or amenity, will it be available to your student? Many of these cutting-edge facilities are only available to researchers, graduate students, and, in some cases, companies who pay for access to the facility. And, while I’ve heard people say that a particular facility will put this school “on the map” for a given field, another school will have the newest, shiniest building or facility next year.
Suppose your student is currently going through or has recently gone through the college admissions process. In that case, you probably know that many schools have become “test-optional,” meaning your student does not need to submit their standardized test scores if they don’t feel it will help their application. The test-optional school looks at the student’s application on a holistic basis rather than starting the filtering process based on test scores. Yet, the average standardized test scores still factor into the magazines’ college rankings. So, the magazines’ methodologies have not kept up with changes in the college landscape.
Another factor to consider is that these media company rankings are generally based on the schools, not the specific department or school within a university you may be considering. You don’t know if a particular department or school is having an outsize effect on the university’s statistics. Again, using just these factors listed above, perhaps nearly all of the professors in the art and engineering schools in a particular university have terminal degrees in their field. But what if, in the environmental science department, only a few have terminal degrees in their field? How do you know this from these magazine rankings? And what if your student is interested in environmental science? Does it matter? Or what if your student is interested in engineering, and you believe it does matter? The percentage of professors with terminal degrees in their field would look artificially low for the engineering school.
And lastly (for now at least), schools constantly move up and down these rankings. If you rely on these rankings, which are released annually, to choose a school, you could just hit on a year when there is an anomaly in the data. For instance, many factors are in flux from the pandemic – class size, faculty size, building projects, real estate acquisitions, etc. The last few years have caused many schools to re-evaluate how they deliver classes, where they want to focus their resources, and, in some cases, their entire mission statement. Just because a particular school shoots up or drops in the rankings may not reflect a baseline change at the school. It may reflect a change in their “competitors,” short-term or long-term economic conditions, or simply a blip in the data.
Ultimately, this time is all about your student. What is best for your student? Where will they thrive? This decision shouldn’t be about prestige. Prestige in a particular field can come and go. In fact, the whole field could come and go. And, if you think about it, you can probably name some schools that were very well-known 30 years ago but are nearly forgotten now. Choose according to the experience you believe your student will have at the particular school – not the experience a magazine editor would like to portray on their pages.
And no one will go back to the Something Something News and World Report edition from 2022 to see if your student’s school was the highest-ranked school 20 years – or even five years – from now. You have no control over those rankings – now or in 20 years. You could be lucky and choose a school that climbs those rankings over the next 20 years. Northeastern University is a great example. Or, you could be less likely to choose a school whose focus does not align with the ranking methodology of these media outlets and therefore declines. Whether the school rises or sinks in the ratings does not affect your student’s education and probably doesn’t matter in the long run. What matters is the formal and informal education your student gains during their college experience.
Do you need long outdoor hikes to unwind? If so, a school in a large city might not be for you. Do you thrive on the hustle and bustle and need many activities and events to choose from at any time? Then maybe a large university or a school in a large city is for you. Either way, try not to choose based on who you want to become rather than who you are. Your surroundings will change one way or another, but you have some control over what kind of environment you will call home for the next four years.
If you are looking at a very competitive school, consider the caliber of the students you’ll be with. On the one hand, you will be with like-minded individuals with similar interests. On the other hand, by definition, 50% of these people will be in the bottom half of the class. Many of these students, perhaps even you, have never had that experience. Can you handle not being the most intelligent person in class? Will you allow yourself to ask for help?
The flip side is choosing to attend a less selective school than average. Will you be challenged enough by the material, the instructors, and the other students? Will you be challenged to be your best self?
Following the last question, how competitive is the environment? Many of these schools are very competitive for admissions. However, they each have their own culture. And that culture might be super competitive even as a student at the school. Or, the culture may encourage sharing and helping others and not focus on curves and rankings. Or it may be somewhere in between. On that spectrum, where are you most comfortable?
Are you not sure what you want to study? Then maybe a large university with many options will work out better for you. College is the first time you can choose the vast majority of your classes, and there will be a wide range of choices. As you try new classes and meet new people, you may become interested in topics you have never considered. Many small schools focus on a few areas of study – such as business or design. However, if you develop a keen interest in a different subject your school does not offer, you may need to transfer to another college or university to pursue that newfound interest. On the other hand, a large university may already provide you with the option to pursue your new area of study. Transferring to another school often means you will take longer to graduate because some credits may not transfer.
Will you be comfortable with the ideology at the school? If you tend to be somewhat liberal or even very liberal in your views, will you be comfortable at a school that tends to be conservative? And the reverse applies as well. Do you tend to be outspoken about your points of view? Will that be permitted, celebrated, or even tolerated? And, even if you don’t tend to be outspoken about your views, will you be comfortable with how others express their views and to what extent expression of prevailing views and dissenting views are encouraged, promoted, or discouraged? Part of the college experience is learning from others and trying to understand other points of view. However, how the expression of those views is encouraged or tolerated will differ from school to school.
Before you take a loan from your 401k, consider this….
Why did you contribute to your 401k in the first place?
To save for retirement.
This is an admirable goal – one that your future self will thank you for. Many 401k plans do not allow you to make contributions while you have an outstanding loan. This means that you may also be missing out on employer matching contributions – which means you could be turning down free money!
For the tax-deferred growth.
When you take a loan from your 401k you aren’t taking a loan from the institution with your 401k as collateral. You are literally taking the funds out of your 401k and then paying them back over time. That means that you would be losing the potential tax-deferred growth on those funds while the loan is outstanding.
For the tax deduction or tax management.
If you contributed to your 401k on a pre-tax basis, common with a traditional 401k, then you did not pay taxes on those funds when you contributed them. When you withdraw the funds in retirement you will pay taxes on the original contribution and any growth that has occurred in the account but you don’t pay taxes annually on the growth (hopefully) occurring in the account.
When you take a loan from your 401k, you take out the pre-tax funds you contributed, and then you pay those funds back with after-tax funds. And then, in retirement, you pay taxes on all of the funds you withdraw, including those repaid loan dollars.
Another major consideration should be what happens if you separate from your employer with a loan outstanding against your 401k. The 401k plan document itself sets forth the options for repaying the loan at that point. In some cases, you’ll be able to continue paying off the loan in regular installments. However, in other cases the loan may be considered a distribution immediately.
There is also the difference between the plan’s treatment of the loan vs. the tax treatment to consider. If your plan forces the distribution treatment of the outstanding loan balance at termination, the IRS allows you to “pay it back” into a rollover IRA prior to the due date of your tax return without penalty. However, this still means that you need to have the cash to put into the rollover IRA.
Another thing to consider is that, even if you are able to continue payments on an outstanding loan when you separate from your employer, that option is only available as long as you keep the 401k with the current plan. If you choose to rollover the 401k to an IRA or to another plan, the outstanding loan amount will be considered a distribution.
Yes, there are times when a 401k loan makes sense or may be the only option. However, I suggest that the 401k loan be considered in emergency cases or as a last resort.
It is true that you’re paying yourself interest. But you’re paying interest with after-tax dollars whereas, if you left those dollars in the 401k, they could be earning tax-deferred returns on your investment. And, while the interest rate on a 401k loan may be low, that means you could likely have made a better return on those funds by keeping them invested.
Also, keep in mind, the employer does not have to approve a 401k loan. So, you should not simply assume that the option is always available to you. They don’t do a credit check, but they may use other factors in their decision such as the reason for the loan, your history taking loans from the 401k, or, if you’re near retirement or the end of a contract, they may question the ability to pay back the loan since regular deductions from your paycheck won’t happen after separation from the company.
This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.
Having multiple income streams is helpful for several reasons:
Diversification of income:
When you rely on a single income stream, you are putting all your eggs in one basket. If that income source is disrupted for any reason, such as a job loss, a market downturn, or a recession, you could be left without any means of support. By having multiple income streams, you spread out your risk and decrease your dependence on any one source of income.
Increased earning potential:
By having multiple income streams, you have the potential to earn more money than you would with just one income source. This is especially true if you can create passive income streams that continue to generate income even when you’re not actively working.
Flexibility and independence:
Having multiple income streams gives you more flexibility and control over your financial life. You can choose which income streams to focus on and how much time and energy to devote to each one. This can give you greater independence and a sense of control over your financial future.
Protection against unexpected expenses:
Multiple income streams can also provide a buffer against unexpected expenses or emergencies. If one income source is disrupted or reduced, you can rely on other income streams to help cover your expenses and maintain your standard of living.
Overall, having multiple income streams can help you achieve greater financial stability, independence, and security, and it can also provide a pathway to higher earnings and greater wealth over time.
Now that the Federal Reserve raised interest rates seven times in 2022, there are some factors that you should consider in your financial planning. When it comes to interest, it makes a difference whether you are a borrower or a lender. We’ll talk about the factors as a lender, or saver, in today’s post. Stay tuned for our next post on considerations as a borrower.
After a decade of extremely low interest rates, we finally have interest rates that can help savers. Here are a few areas where some adjustments to your plan may be in order.
Is your money working for you?
Did you know that, as of February 2023, you can get 3.75% APY on your savings account at a large national bank and even higher if you go with some regional banks? That means you can earn $375 on $10,000 of your emergency fund just by having it in one of these accounts. On the other hand, many of the large national banks are still only paying .01% on their savings and money market account. So, you can earn .01% or you can earn 375 times that amount by looking around for better interest rates.
Reconsider your accelerated mortgage payments
Have you been making additional principal payments on your mortgage to pay it off more quickly? If your mortgage interest rate is at 3.25% and you are earning 3.75% on your funds in the bank, you may want to take the extra funds that you’ve been dedicating to mortgage payments and earn more on those funds in the bank.
How about your tax return?
For at least a decade, interest rates were close to zero. Aside from avoiding giving your hard-earned money to the government any sooner than you needed to, there was little reason to ensure that you weren’t withholding too much from your paycheck in income taxes – unless you were actually investing. Now that we have reasonable interest rates, you could be earning interest on those dollars. The government doesn’t pay you interest on those dollars unless they unnecessarily delay your tax refund after you’ve filed your tax return. So, now it has become a question of whether you earn interest on those dollars or the government earns interest on your dollars. The caveat here is that you would need to put those extra dollars where you’ll actually earn the interest income rather than spending the extra dollars.
Note on on blog posts and newsletters: When we work together, we examine your particular financial picture and your particular goals. Blog posts and newsletter articles are not individualized advice. They are intended to be thought-provoking and to surface discussion topics for your financial planning. If you have questions about your financial plan, feel free to schedule a meeting. Your first meeting is complimentary.
