This is an old post but I think it is worth bringing it back to the more recent posting list. Unfortunately, this is still happening more and more in the current economic environment.
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I talked with one of my long, lost friends from college the other night. He got my phone number from a mutual friend of ours and gave me a call. It was great talking to him and we spent about two hours on the phone trying to catch up. If you know me, you know that I hate talking on the phone for more than a few minutes so two hours was an extremely long time for me. It was nice to catch up with an old friend but unfortunately, all the news was not good.
He has been working for a IT company for the last five years and is making a nice six figure salary. Unfortunately, he is also spending like he makes six figures and has a nice house, two new cars, a houseboat and a motorcycle. He is the sole breadwinner since his wife stays at home to care for their two year old child. He received an email from his boss the other day saying that they need to have a meeting. This was strange to him since he almost never has to meet with his boss. His boss would not tell him what the meeting is about but would only say that he "may want to have his financial affairs in order". My buddy states the company has laid off a few people this year but he was told that he would be okay and that his job would be protected.
My buddy is now pretty scared that he is about to be laid off. He will probably get a pretty good severance package but one that is gone, he won't have anything to fall back on. He has no savings account and borrowed from his 401k to finance his boat. If he loses his job, the money he borrowed from his 401k will need to be paid back immediately or he will owe the federal government since that money will be taxed. Even if he hadn't borrowed money from his 401k, if he were to use the money prior to retirement, he will owe taxes and penalties for early withdrawal.
Emergency Fund. No matter what you call it, everyone needs to have cash set aside that they can get their hands on in the event of an emergency. Many financial planners recommend three to six months set aside to keep you afloat until you can get another job. Depending on your individual situation, I would recommend having six to twelve months of expenses set aside in this economy. I've set aside 8 months worth of expenses in case my employer decides they don't need anymore. I would keep my emergency funds in a simple savings account. With interest rates so low right now, you'll usually find the best rates online. I recommend WT DIRECT or HSBC for an online savings account. Both of these are free, no minimum balance accounts which means you can open them with $5 or $500 and you won't pay any minimum balance fees. (There goes your excuse about not having enough to open an account.)
If you don't currently have an emergency fund, don't wait, now is the time to start saving for the unexpected.
Live Below Your Means. My buddy makes over 100k a year but he also spends just that much. If he had only managed to spend less than he earned and set some money aside, he might be able to breathe a little easier right now. Just because you make $100k doesn't mean you don't have to spend $100k!!
There you have it. This post should be the inspiration you need to start saving. There is a good chance that your job is not guaranteed. You could get the axe at any time and you need to be prepared.
Image Credit: Daquella Manera
Fantastic post! I love it when real world examples get applied to financial ideas. I actually just blogged about the emergency fund myself just yesterday.
Keep up the good work!
Ugh! Borrowing from 401k for a boat? Does he live on the boat or is it just for fun?
Oh really? 6 to 12 months worth of cash money set aside to fund,and cover an emergency household fund. Well lets see now, my monthly total bills are right at $3,800. Times 12=$45,600 dollars. While having this amount saved up would sure be great. How many Americans, or the everyday American family, with three kids growing up afford to do this?? They`d be lucky to have two months worth. Now if your talking to the upper 30% of Americans, who have yearly incomes of well over $150,000 to $350,000, take-home pay, then yes, this would be a smart thing to do.
@anon
I am a self employed mother of 5. We had only 2k saved up for an emergency. It lasted us 3 months. You need to lower your expenses. I do not get any government help.
Hopefully your friend will have time to get that emergency fund built up and be offered severance if he does get laid off.
When I was laid off from my last job I was the last person to go. After they had exhausted everything they had nothing to offer me for severance. Luckily I had a small emergency fund in place and another job lined up already.
@ scott: Nope, the boat is just for fun.
Grim reminder to me as I have been thinking about quitting my job too.
What was his hardship that allowed him to borrow from his 401k?
Anyway, this is a all to familiar story. Hopefully, he will get luck but no one realizes it until it happens to them.
@Rick: I'm not sure if he claimed a hardship or not. I know with my 401k, I am preapproved for a loan up to a certain percentage of my balance.
Thanks for this story. This remind me that at the middle of month i just realized that my saving wouldn't be enough for this month's fee.
Since then, i have a faith to buy $1 if i have $3 because it will make me survive until the end of month and have a little extra saving
I feel for your friend. I was laid off about 6 years ago and would have been living in a box on the street if my parents hadn't helped me. I will be in better shape if it happens again. Your friend needs to consider selling the boat and some of his other luxury items so he will have a really beefy emergency fund. ESPECIALLY since he is the sole breadwinner.
Bills are $3800 a month? Maybe you should cut back your expenses and save until you can boost your emergency fund up to a point that you can cover that for 6 months. Living without the means to weather a financial setback is reckless and irresponsible, especially if you have other people depending on you.
Anonymous at 3:36 how do you know that isn't bare bones budget for this individual? It isn't like every place in the country has the same cost of living and that people have the luxury of moving on a whim(hint: that costs monet too).
Personally, I agree with the poster. $3800(housing, food, transport is not an exorbiant amount to spend monthly in this economy. Saving 12 months of that is not going to be something that most households could undertake.
Isn't getting laid off the primary reason for an emergency fund, rather than "another"?
very timely post. if i were suddenly laid off, without an emergency fund i'd be forced to sell my taxable mutual fund investments (extra set aside for retirement) and in this stock market, i'd have to take a big loss. So am bulking up my previously very small emergency fund now.
Lifestyle inflation is a major financial problem. If only we would learn to live on less as our income increases. I am guilty of the same thing, and am working right now to correct it.
When I got laid off we reduced all our expenses in order to survive on my husband's income alone. I'm still looking for another job, but we've become so used to living with less over these past few months that I'm pretty confident that if I do get another job, the only expense we'd add back in would be daycare (which would be expensive during the summer, but once school starts in the fall it would drop back down). This would mean the rest could go to savings and paying down debt. A nice thought!
He took out a loan from his 401k to finance a boat?! Really? That poor, poor man. :( I wish there was someone around that could have talked him out of that expensive mistake! Well, what's done is done. Do you have an update on how your friend is doing now?
I also agree with your point of having a larger emergency fund, this is especially true if you are single. Another thing to consider, let's say for some reason you become disabled. You may have disability insurance or get Social Security, however it can take upwards a year to get get those benefits on a regular basis. Three to six months just isn't gonna cut it for most people but it's a good start. It's taken me a few years, however I have enough to last me about 10 months, and that would include monthly COBRA payments if I get laid off. The goal is to eventually reach a 1-yr. emergency fund. It'll take a while, but it can be done.
I agree with Passive Dad; although he's in a bad situation now, it's his own doing - borrowing from your 401k for a boat is really unwise. I wonder if there's anyone doing stuff like that anymore in this recession.
Great post. I always wonder how people who make so much money (six figures is a lot) can lose everything so quickly. Of course, not saving and spending so much money on material things and living only in the now destroys financial security.
I think it would be a good idea to teach money management in elementaries and high schools.
My husband quit his job after seventeen years with my blessing last week. We think this action will add 10 years on to his life. High stress for high pay is not everything and there is no loyalty in large companies. If they want to adjust their bottom they will, no matter how many people they have to lay off to do it. Why did he quit? A series of events over the past five years took him to a breaking point and he could not spend another day of his life wasted there. I agreed and fully supported him. The good thing about having an emergency fund and always living your life a certain way financially is that we will be alright no matter how little we make. In our case we have always had two incomes which makes it easier but we still would be okay for at least six months without any income due to the way we live our life.
Do you have an update on your friend at this point? I wonder if he was able to find another job and if he still has his boat.