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How to build a cushion against all those pesky expenses

How to build a cushion against all those pesky expenses
An emergency fund is crucial for handling unexpected expenses, but you also need to save for the expected expenses. (Brian van der Brug / Los Angeles Times)

Dear Liz: We’re both retired and live on retirement checks. When expenses exceed our income, we draw from savings, but the balance is going down fast due to a new air conditioning unit, real estate taxes, etc. How do we put that money back and build a cushion in the checking account so our savings isn’t used to cover us month to month?

Answer: You need an emergency fund for truly unpredictable expenses, but you also should have a bunch of savings “buckets” to cover less regular but still predictable expenses. These would include property taxes, insurance, home repairs, car repairs, vacations, medical bills, holiday expenses and any other bill you face regularly but not monthly. You can track these buckets in a spreadsheet or set up separate savings accounts for each goal. Online banks typically let you set up multiple savings subaccounts for free.

Here’s how it works. If your next property tax installment is due in six months and you’ll owe $3,000, you transfer $500 a month into the property tax savings account to cover that bill. If you’re planning on a vacation in nine months, divide the expected cost by nine and transfer that amount to savings each month.

Estimating some costs can be tricky. You often can use last year’s spending as a guide, or seek out authoritative sources. Edmunds.com’s True Cost to Own feature, for example, can help you estimate repair and maintenance costs for many vehicles. With home repairs, Consumer Reports can help you calculate how long various systems tend to last and how much they cost to replace, which will allow you to save accordingly. Or you can just use the rule of thumb to put aside 1% of your home’s value each year into an account to cover maintenance and repairs.

You may not always guess correctly, but setting aside something throughout the year can help you meet these big expenses as they arise without having to dip into your emergency fund.

You may discover that you can’t set aside enough to cover these less regular expenses and still pay your monthly bills. If that’s the case, you may not be able to afford your current lifestyle and may need to trim some costs.

Parents paying a child’s private student loans

Dear Liz: My husband and I are paying my youngest son’s private student loans. My husband is paying two loans and I’m paying three. I have plans to retire next year. Should I tell the lenders after I retire and give my loans to my son to take over?

Answer: If these are private student loans, then you and your husband probably co-signed them with your son. That means you’re equally responsible for the debt and can’t just walk away without consequence.

Some lenders do release co-signers if the student borrower is creditworthy. The lenders typically don’t volunteer information about this option, so your son would need to request it. The Consumer Financial Protection Bureau has a form letter your son can use to ask for information about the process.

If that doesn’t work, your son may be able to refinance or consolidate the loans with a new lender to get your names off the loans.

All this assumes your son is willing and able to take over this responsibility. If he’s not and you stop paying, your credit scores will suffer and you could face collection actions.

The insecurity of bank security questions

Dear Liz: I recently opened an account at a bank that boasted “multi-factor authentication,” but I looked into the claim and it turns out the bank is using passwords plus answers to security questions, such as the name of your first pet, as the “multi-factor authentication.” I expect you know that the real multi-factors are something you know, like a username and password, something you have, like a code that has been sent to your phone or email, and something uniquely inherent to you, like a fingerprint. Clearly, this bank is misrepresenting its “multi-factor authentication.”

Answer: If there was any doubt about how insecure security questions are, it should have been settled with the hack of the IRS’ Get Transcript service. The criminals gained access to 700,000 taxpayer accounts by correctly answering multiple questions with answers supposedly known only to the affected taxpayers. In reality, the answers to many security questions can be purchased from black market databases or simply found by perusing people’s social media accounts.

If your financial institutions are still using security questions to identify you, you should demand to know why. If the institution doesn’t offer at least two-factor authentication (a password plus a code), you should consider putting your money somewhere else.

Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the "Contact" form at asklizweston.com. Distributed by No More Red Inc.

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