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One of the more common questions in financial planning is how much to save for an emergency fund. It’s sort a personal question, really, I mean the answer to the equation is personal. Some people feel quite comfortable with three months of basic expenses set aside for a rainy day. Others, like me, have a goal to save one year of basic expenses in the event I lose my job, or am unable to work.

What are Basic Expenses?

Regardless of your goal in terms of the number of months you prefer to have saved, you must first conduct the important exercise of listing your current expenses, and then identifying which of those you would cut in an emergency. What’s left is often referred to as “basic” expenses. Consider things like electricity, car insurance, gasoline, food, and of course, rent or mortgage payments.

In my family we have agreed a number of things we pay for today could be easily dropped tomorrow if we lost our income. The gym membership would have to go. Cable and other entertainment options would be eliminated. I’d probably keep Netflix because streaming movies and television shows is such a cheap entertainment option. I’d also keep internet access and at least one cell phone active for job searching, networking, etc.

Conventional wisdom is that our monthly budget would actually go down considerably if we lost our income. Not so fast.

Accounting for New (Increased) Expenses

It wasn’t until I performed the exercise of listing our current expenses and then putting together our “emergency” budget that I realized our expenses would actually go up; not down. This concerned me because I had always assumed I needed less emergency fund since we’d be reducing our monthly expenses in an emergency.

I had not considered things like COBRA insurance, a costly way to keep health insurance coverage for up to 18 months (even longer, in some scenarios) after separating from your employer’s plan. I asked around and found out that COBRA can run as much as $1,500 a month for full family coverage. Essentially, you are paying both sides of the insurance premium, where your employer used to pick up a substantial portion of the costs.

Sure, you may be able to ultimately find a cheaper health insurance plan, but for the first month or two you are probably going to be preoccupried while scrambling to find work.

So even after cutting the cable, reducing our entertainment budget, and eating beans and rice all month, there was little chance I could make up for the increased costs of COBRA. But that wasn’t the only increased cost to consider.

Imagine if you were laid off in 2009, when gasoline for the average family worked out to about $173 a month. In less than a year, your monthly budget for gas budget would have increased to $281.06, an increase of over $100 a month. Sure, if you weren’t working you wouldn’t be commuting, but job hunting would still have you out and about burning gas. Today, many households are paying over $400 a month for gasoline.

Also be sure to account for food inflation. If your household grocery budget looks like mine, it seems we are constantly having to raise our food category. Not necessarily because we are buying more, but because the prices have gone up while the product sizes go down. Corn has almost doubled in the past 12 months.

When planning how much to keep in an emergency fund, don’t assume your post-emergency expenses will be significantly lower than your current expenses. In fact, it might make sense to save x number of months times a small increase to your regular expenses.

If you normally spend about $3,000 a month, and aim to save 6 months of expenses, normally you would anticipate a healthy savings balance of $18,000 to cover you. However, one could make an argument for rounding that up to $20,000, or even assuming a new $3,500 per month budget and saving $21,000 in an emergency fund.

I do believe you can save too much in an emergency fund, because money in excess of one year of expenses should probably be exposed to more risk, and therefore more opportunity for growth, than a money market account. However, I’ll finish this post the same way I started it–saving for emergencies is personal, based largely on your individual budget, and you and your family’s appetite for risk.

If saving 18 months of expenses helps you sleep better at night, then by all means, build that cash stockpile. If you and your spouse’s jobs are steady, you have other investments you could liquidate penatly free (Roth IRA contributions, etc.) and you’d like to only save up 3 months of expenses, then only save 3 months of expenses. Just be sure to save adequately for those three post-emergency months by not underestimating new expenses.

Post by Frugal Dad

What do Cameron Diaz, Kate Winslet and I have in common, you ask? Aside from ravishing good looks, we share an interest in home exchanges. Cam and Kate’s new movie “The Holiday” follows the exploits of two strangers who decide to swap their residences in Los Angeles and England. I am about to take the plunge and sign up as a house swapper too.

I may be a wee bit travel-obsessed. I devour travel books and magazines and spend hours on tripadvisor.com looking at hotels in Suriname and Morocco that I will probably never visit. So when a friend of mine recently mentioned that she is a veteran home swapper, my interest was greatly piqued.

Simply put, a home exchange is when two parties agree to trade homes for a pre-determined interval. There are many types of agreements, including simultaneous and non-simultaneous exchanges, hospitality exchanges, and exchanges with a vehicle option.

Home swappers normally pay a fee to join a home exchange service, but there is no charge for accommodations once a swap is agreed to by both parties.

The concept of home exchange has been around for a long time, but dedicated websites have taken the home exchange concept to a new level. There are many websites dedicated to introducing prospective home swappers to each other. Some have huge databases of potential exchanges, while others focus on niche markets such as luxury homes or home swaps for singles.

The Upside

• Cha-Ching! Your family can visit countless destinations and pay nothing for accommodations, beyond the nominal fees charged by the exchange service.

• Local Flavor: You can live like a local by drawing on your exchange family for tips on cultural events, restaurants, shopping, and attractions.

• No Hotel Hassles: You will be immersed in a community rather than being warehoused in a bleak hotel with impersonal service.

• Free Wheels? You may be able to negotiate the use of the exchange family’s car, avoiding pricey rental car fees.

• Convenience: When you stay in someone’s home, you will have use of the kitchen, computer, laundry room, DVD player, toys and games, bookshelf, etc. Cooking and washing at home are huge money savers and all the other items are gravy.

• Camaraderie: You may develop personal connections and long-lasting friendships with other home exchange families.

• Safety: In many cases it is safer to have visitors in your home rather than leave it unoccupied during your vacation. Home exchangers can alert you to any problems that arise during your absence (e.g., leaky roof) and their presence will serve as a deterrent to burglars.

• Free Pet-sitting: Your exchange family may be willing to babysit your pooch while you are on vacation saving you expensive kennel fees.

The Downside

• Time Suck: It can be difficult and time-consuming to find a suitable exchange property. The sheer volume of listings can be overwhelming, and factors such as location, party size, travel dates, and home amenities and quality can make finding an appropriate exchange a chore.

• Ick Factor: It might give you the heebie-jeebies to have a stranger in your house or to stay in the home of a stranger.

• False Advertising: Inaccurate property descriptions are said to be uncommon, but are always a possibility.

• Tough Sell: Homes in resort or tourist destinations are obviously easier to trade. If your home is in the middle of a wheat field, you might have a harder time attracting potential swap partners.

Other Considerations

Normally homeowner’s policies remain in force during a home exchange. This is because visitors are considered guests as opposed to renters, since no money changes hands during a home exchange. Likewise, car insurance normally covers drivers that are using your car with your express permission.

It’s a good idea to check the details of your specific homeowner’s or auto policy or speak to your insurance agent before committing to an exchange. It’s also acceptable to include parameters for the use of the vehicle such as mileage or travel restrictions and minimum age for drivers.

Most swaps are simultaneous, meaning the two parties occupy each other’s homes over the same time period. However, there are also plenty of non-simultaneous swaps available, especially since many people use their vacation homes for exchanges.

A hospitality swap is when you visit another party’s residence, while they are home—essentially as their houseguests. The type of swap you arrange depends on many factors, including the flexibility of your travel dates, your preferred destination, and personal preferences.

Trust, but Verify

The entire principle of home exchange is based on trust: trust that the homes will be as advertised, that both parties will adhere to the stated timeframes and conditions, and that the properties will be cared for responsibly during the stay. Most veteran home exchangers report that the degree of mutual trust and respect is quite high, and negative experiences are rare.

The most important factors in ensuring a positive home exchange experience are good communication and thorough research. Exchanging details about the properties and researching the area to be visited will keep surprises to a minimum and leave both parties satisfied.

Where to Start

There are loads of home exchange sites on the Internet, but a few popular sites are:

• homeexchange.com
• ivhe.com
• homeforexchange.com
• digsville.com
• homebase-hols.com

For newbies like me, it’s also helpful to get advice and tips from experienced exchangers. There are numerous blogs on home swapping, such as homeexchangeguru.com, which provides valuable insights and information.

Now for the hard part—deciding between an apartment in Amsterdam and a cottage in Scotland…

This article was written by contributing author Laurel Gray.

Post by Frugal Dad

Eventhough adolescents need just as much sleep as younger children, sleep times decrease over the course of development, leaving a number of teens chronically sleep-deprived. Studies have consistently indicated that insufficient sleep can have a negative effect on a number of aspects of adolescents' lives, leading to mood disturbances, poorer physical health, and academic difficulties. But few studies have examined how sleep affects the ways adolescents function on a daily basis or how the effects of sleep change over time........

Cincinnati, OH, March 31, 2011 -- Roughly 15% of children suffer from migraines, and approximately one-third of these affected children have migraines with aura, a collection of symptoms that can include weakness, blind spots, and even hallucinations. Eventhough the causes of migraines are unclear, a newly released study soon to be published in The Journal of Pediatrics suggests a correlation between migraine headaches in children and a heart defect called patent foramen ovale, which affects 25% of people in the U.S........

A newly published report reveals that children with epilepsy are more likely to have psychiatric symptoms, with gender a determining factor in their development. Findings showed that girls had more emotional problems, while boys had more hyperactivity/inattention problems and issues regarding peer relationships. Details of this study in Norwegian children are now available online in Epilepsia, a journal published by Wiley-Blackwell on behalf of the International League Against Epilepsy........

Adolescents and young adults are neither children nor adults and those affected by cancer require targeted care that crosses the boundaries between pediatric and adult oncology, as per several pioneers in this still-developing field of adolescent and young adult oncology. An illuminating roundtable discussion by these experts would be reported in the premier issue of Journal of Adolescent and Young Adult Oncology, a multidisciplinary peer-evaluated publication of Mary Ann Liebert, Inc. (www.liebertpub.com). The Roundtable has been published ahead of the print issue and is available at www.liebertpub.com/JAYAO. The full issue will launch in April 2011........

Young adults whose parents monitor their social interactions appears to be less likely to display impulsive behavior traits and to have alcohol-related problems, a newly released study suggests. The level of monitoring is associated with parenting style, and the link is stronger with the parent of the opposite gender........

Children experiencing an asthma attack who are treated with a short burst of oral steroids may have a transient depression of immune response as per a newly released study led by Universit� de Montr�al. These findings, published in this month's issue of Pediatric Allergy, Immunology and Pulmonology, have implications for asthmatic children who have flare-ups and who appears to be exposed to new contagious diseases........

A computational physicist and a cognitive neuroscientist at Children's Hospital Boston have come up with the beginnings of a noninvasive test to evaluate an infant's autism risk. It combines the standard electroencephalogram (EEG), which records electrical activity in the brain, with machine-learning algorithms. In a pilot study, their system had 80 percent accuracy in distinguishing between 9-month-old infants known to be at high risk for autism from controls of the same age........

Research presented this week at the annual meeting of the American Association for the Advancement of Science highlights the importance of callous-unemotional traits (CU) in identifying children at risk of antisocial behavior and other adjustment problems. The research, presented by Indiana University Bloomington faculty member Nathalie M.G. Fontaine, finds that the emergence of CU traits in childhood is in most cases influenced by genetic factors, particularly in boys. However, environmental factors appear to be more significant for the small number of girls who exhibit high levels of CU traits........

When it comes to curing skin infected with the antibiotic-resistant bacterium MRSA (methicillin-resistant Staphylococcus aureus), timely and proper wound cleaning and draining appears to be more important than the choice of antibiotic, as per a new Johns Hopkins Children's Center study. The work is reported in the recent issue of Pediatrics.......

Children with attention-deficit hyperactivity disorder are two to three times more likely than children without the disorder to develop serious substance abuse problems in adolescence and adulthood, as per a research studyby UCLA psychology experts and his colleagues at the University of South Carolina........

Two years after the reauthorization and expansion of the Children's Health Insurance Program (CHIP), a new Commonwealth Fund state-by-state scorecard evaluating how the health care system is working for children finds that federal and state action on behalf of children has helped preserve, and even expand, health coverage for this group, despite the severe recession. Yet wide differences persist among states when it comes to health insurance coverage, affordability of health care for families, children's receipt of preventive care and therapy, and the opportunity for children to lead healthy lives. Children living in the five top-ranked states�Iowa, Massachusetts, Vermont, Maine, and New Hampshire�are more likely to be insured and to receive recommended medical and dental check-ups than children living in poorer-performing states like Florida, Texas, Arizona, Mississippi, or Nevada........

Alexandria, VA � Tonsillectomy is the most common major surgical procedure performed in children. Children who undergo the surgical removal of their tonsils (tonsillectomy), with or without the removal of their adenoids (adenoidectomy), are at increased risk for becoming overweight after surgery, as per new research reported in the February 2011 issue of Otolaryngology � Head and Neck Surgery.......

Visionaries in the field of cardiac therapeutics have long looked to the future when a damaged heart could be rebuilt or repaired by using one's own heart cells. A study reported in the recent issue of Circulation, a scientific journal of the American Heart Association, shows that heart stem cells from children with congenital heart disease were able to rebuild the damaged heart in the laboratory........

There's a reason why Hollywood makes movies like Arachnophobia and Snakes on a Plane: Most people are afraid of spiders and snakes. A new paper published in Current Directions in Psychological Science, a journal of the Association for Psychological Science, reviews research with infants and toddlers and finds that we aren't born afraid of spiders and snakes, but we can learn these fears very quickly........

Current guidance advising mothers in the UK to exclusively breast feed for the first six months of their baby's life is being questioned by child health experts on bmj.com today. The authors, led by Dr Mary Fewtrell, a consultant paediatrician at the UCL Institute of Child Health in London, have evaluated the evidence behind the current guidance and say the time is right to reappraise this recommendation........

Now Refundable.  As I posted some time ago, the adoption credit is now a “refundable” one, meaning that you may be able to claim it even if you owe no tax, for qualified adoption expenses that first became allowable in 2010 and for adoptions finalized in 2010.  Also, and Adoption Tax Credit balanced that were carried forward from tax years 2005 through 2009 also are now refundable in 2010.

The IRS Notice 2010–66, 2010–42 I.R.B. 437 explains this in more detail – a link to that Notice is here  www.irs.gov/irb/2010-42_irb/ar09.html.

Before this change, the adoption tax credit was non-refundable, meaning that it only could be used to reduce your tax liability, but credit amounts in excess of tax liability could only be carried forward for up to 5 subsequent tax years.   

The maximum credit amount and the exclusion for employer-provided benefits were each increased to the amount of $13,170 per eligible child for 2010. SA was the case before, that amount begins to phase for adoptive parents whose modified adjusted gross incomes exceeded $182,520 and is completely phased out for modified adjusted gross incomes of $222,520 or more.

New Documentation Required.  To claim the refundable adoption credit in 2010, qualifying adoptive families must complete and attach the new 2010 version of the IRS Form 8839 to their income tax return.  Additionally, one must include copies of some of the adoption-related documents. The documentation required varies and depends on whether the adoption was finalized in 2010 and whether the child is deemed a “special needs” child for tax purposes. The From 8839 instructions give examples of the specific requirements and documents needed for each child claimed.   Because of the new documentation requirements, one apparently cannot file an electronic tax return with Form 8839.

Please check with your accountant who should be informed about most of these changes but a quick search for “adoption tax credit” on the IRS website (www.irs.gov) will show you a wealth of good information and the forms that one needs to insure all of the new rules and requirements are being followed.   

Mark

CNN Money has a good article about six new small business tax breaks. Even with the new tax breaks, make sure you’re accountant, bookkeeper, staff and managers are tracking expanses with hard copies of receipts. I am always surprised how often tracking back an expense for a client becomes challenging because the receipt is missing. [...]