So, you know you need an emergency fund.  You've been trying to build one, but just can't seem to get there.  The percentage of people living paycheck to paycheck ranges depending on who's surveying from 47% (Careerbuilder 2008 survey)  to 71% (American Payroll Association 2008 survey).  This issue isn't unique to any particular income level - the Careerbuilder survey also shows 21% of Americans with $100K+ incomes living paycheck to paycheck.  Whatever the actual percentage is, if you're one of the people in the paycheck-to-paycheck boat, you know how challenging it can feel to change the situation.

 

If you're determined to make this change, you have to do more than nickel and dime your emergency fund.  More than the popular "save the change" program on your credit card (nothing wrong with this, it's just not enough). The small things do add up, but it's very slow and doesn't really give you that sense of accomplishment most of us need to continue. 

 

First, set a goal. 

Ideally, you'd have 6 months' of living expenses in an emergency fund.  But for a true paycheck-to-paychecker, thinking about the ideal makes you laugh.  So start with $1,000.  Then when you get that, you can change your goal to one month's expenses.  Then three, etc.

Second, set a timetable. 

Don't give yourself a lot of time to save $1,000.  You want a sense of urgency to achieve your first milestone.  I'm not going to get specific here because depending on your income level, it might be reasonable to do it in one month or three months.  But I wouldn't suggest more than six months for anyone.

 

I will save $_______  by ______ (this date) by doing items 1)______________, 2)__________, and 3)____________.  Your chances of success increase exponentially when you write your goals down and share them.  Good luck!

If we knew the future, we wouldn't need to diversify our investment portfolios.  We would just pick the asset class that was going to do the best and put all our money there.  But of course, none of us know the future.  And while we may have strong opinions and reasoned analysis that supports what we believe will happen, we would still be foolish to "bet" that our predictions will be 100% accurate.

 

Diversifying your portfolio is one of the fundamentals of successful investment.  You seek asset classes that don't move in the same direction as each other and that will produce different results based on different economic conditions.  Here are some of the factors we need to consider in building a diversifed portfolio:

Deflation vs. inflation: Many economists--including those at the Federal Reserve Board--are concerned about the potential impact of prolonged drops in stock or housing values. However, efforts to combat deflation also raise the specter of potential inflation. Your portfolio should take both possibilities into account.

 

Currency fluctuations vs. stability: Risk aversion last year boosted the U.S. dollar. However, that trend could reverse at some point if investors tire of Treasuries' low returns or become more concerned about rising U.S. deficits. Balance that possibility against potential instability in overseas currencies and markets.

 

Income vs. growth: A company's ability to provide stable dividends may assume greater importance. Balance the benefits of ongoing income against the fact that smaller, growth-oriented companies have led the market out of every recession since 1971.

Most Americans are not subject to the federal estate tax at its current exemption levels.  For 2009, each person can pass $3.5 million to heirs estate-tax free at their death.

 

However, if your estate has the potential to be affected by the estate tax, you have some planning opportunities right now.  A down market can mean tough times, but it can also present unique opportunities to minimize property transfer (gift and estate) taxes. While owning assets that are losing value might seem like a bad thing, it may actually be a great time to reduce your taxable estate by gifting those assets to beneficiaries. That's because current low asset values and interest rates enable you to make gifts at a lower gift tax cost. And, if and when the market rebounds, those assets will be growing in your beneficiary's estate and not in yours. Here are a few gift-giving techniques that take advantage of today's economic climate.

Each year, you can make gifts of up to $13,000 to anyone you want, to as many people as you want, tax free under the annual gift tax exclusion. You can give away twice that amount if both you and your spouse make the gifts together (this is called gift splitting). And, you can give away an unlimited amount if you pay tuition or medical bills on behalf of another person (just be sure to make these payments directly to the school or health-care provider).

You can lend money to your children at the current IRS minimum interest rate (known as the AFR, which changes monthly), and then potentially forgive an amount equal to the gift tax exclusion each year. (The gift tax exclusion amount is adjusted for inflation; $13,000 is the figure for 2009.).

Additional down-market estate planning opportunities include grantor retained annuity trusts (GRAT), intentionally defective grantor trusts (IDGT), and charitable lead trusts (CLT).  For information on these, visit www.KeenerFinancial.com.