FINANCIAL PLANNING PERSPECTIVES

Resetting your recession-era budget? There may be money in places you haven’t checked

Despite small glimmers of light in an otherwise worrisome economic picture, Americans are still losing their jobs and companies are still cutting back. So if you’re looking for ideas to raise cash during these tough times, here are a range of things you should try and a few things you should avoid.

Start with a family meeting. Sometimes the best money strategies come from coming clean. A family meeting, where everyone identifies areas where he/she can save a little, is a good first step to finding more solutions. Here’s the point: if you want to find cash, the best place to start is by cutting things you and other members of the family don’t need. Admitting those things is the first step to saving money.

Find alternate transportation. Take the train or bus, carpool, or if you can, get rid of a car you really don’t need. Once you count up your expenses for gasoline, insurance, and maintenance expenses, you’ll definitely find a significant pile of cash. And if you decide to keep your car, you should definitely rebid your auto insurance to get a lower rate or to decide whether to drop collision coverage on a paid-off set of wheels.

Find additional income. If you can add hours at work or find a second job, do it. Of course, check with a tax professional or a financial planner to find out if this additional income might put you in a higher tax bracket and therefore defeat the purpose of gathering that income. In most cases, bringing in more cash is a better way to solve a funding problem than liquidating assets.

Tap your emergency fund. Note that we put this item a few notches down because you should always find ways to preserve an emergency fund if you can. As a reminder, every individual or family should have an emergency fund that contains enough money to cover three to six months of living expenses. Oh, and if you don’t have an emergency fund and you don’t have to pay off debt, it might be wise to redirect the dollars you save into building one.

Sell taxable investments, if they’re still at a loss. Again, this is a good reason to consult your tax or financial adviser first, but selling some losing investments might be a good way to raise cash in a hurry. Note that we’re not talking about IRAs or any other tax-advantaged accounts. But taxable investments sold at a loss—if they’re investments you feel you can live without in the future—might kill two birds with one stone, making your bank account and tax picture healthier.

Ask a family member or a friend for a gift. If you don’t feel it will damage your relationship, it might be worth asking if friends or family can offer up to the $13,000 is the annual tax-exempt gifting limit in 2009. Remember that a friend or relative may give an unlimited amount if they write the check directly to a school or hospital, but they should check with their tax advisor and those institutions for the proper way to transfer those funds.

Crack open a CD. You might want to cash in a CD before it’s due only if the penalty or lost interest doesn’t make a difference to you. Depending on the CD’s term, you might end up giving up all the interest you’ve earned if you’ve held it only a short time but getting cash in hand might be worth considerably more to you.

Borrow against a whole life policy. If there’s cash value on a whole life policy you can borrow against, check it out. The rate will be low and the money’s fairly quick—just don’t liquidate the policy without checking.

Ideas you should avoid

Withdrawing funds from your IRA. If you’re under 59½, you’re going to have to pay a 10% penalty and you lose savings momentum. And no, you can’t borrow from an IRA; you can only withdraw and pay penalties.

Credit card cash advances and convenience checks. Despite tantalizing zero-percent offers, you’ll be paying hefty fees to borrow—anywhere from 2 to 5% of the check amount—in addition to the interest you’ll be charged until you pay off the balance.

Payday loans. The interest rates on payday loans can start at 30% and eventually gather fees that can lead to a triple-interest-rate cost for a simple loan of a few hundred dollars.

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TIPS TO HELP BUILD A SAVINGS STRATEGY

If you start recording the money you spend and compare it with the money you save, you might find that your spending exceeds your savings!

It doesn’t matter if you have never saved - now is the time to begin! Read below for creative strategies for saving money at the end of every month.

Be smart with bank accounts and use cash for the majority of your expenses

• When you are going to take money out of the ATM, withdraw a fixed amount and make it the maximum amount you spend during the week  
• After setting up a separate savings account, ask your employer to deduct a set amount from your paycheck each pay period and deposit it automatically into your savings account.

Change your daily food purchasing habits. Remember that the small things make a big difference!

•   Make a shopping list before you go to the supermarket and only buy the things you have written down.
•  Arrange with your friends and neighbors to buy in large quantities to reduce individual costs. 
•   If you are going out to eat with friends or family, go out for lunch; it will cost less than eating dinner in a restaurant.
•   Make coffee at home or at work, rather than buying it.
•  Make lunch at home and bring it to work.

Reduce your household expenses. 

• Consider investing in an energy audit to determine which appliance in your home uses the most energy. Once you know, use it less or replace it with a more efficient appliance.
• Save on utilities (turn down the thermostat, insulate windows and doors, etc.) 
• If you have a long distance calling plan that you don’t use very often, consider replacing it with pre-paid calling cards.
• Use at least one-third less soap when washing clothing and dishes.

Reduce your transportation expenses.  

• Depending on where you live, try to use public transportation, use a bicycle, or arrange to share a car with other people.

Manage your tax returns 

• Be informed as to which expenses qualify as deductions on your tax returns (being a small business owner or making a donation to a charity).
• Use your tax reimbursement wisely: pay credit card debt or deposit part of it into your savings account.

Remember that the most important thing is to save on a regular basis. Start with a small savings goal (an amount that can easily be put aside) and turn it into a habit. Committing to “saving first” can result in a large sum of money in the future. This will give you financial security, which is especially important in difficult times like these.