Building an emergency fund
Life is full of surprises, and not all of them are pleasant. A family, living comfortably today, can be below the poverty line tomorrow if one or both breadwinners lose their jobs. The boyscout motto of “be prepared” is a sensible one for all of us, particularly when it comes to finances. Having an emergency fund has never been more important than it is in today’s volatile economy.
Unexpected financial emergencies come not just in the form of a lost job. There are medical emergencies, home and auto repair, legal expenses or any number of unfortunate things that can come from out of nowhere. An emergency fund is necessary to prevent us from running up overwhelming credit card debt or taking out high-interest loans when faced with one of these unexpected contingencies.
How large should the fund be?
Most experts agree, an emergency fund should be large enough to cover living expenses for three to six months. However, in this economic downturn, with an unpredictable stock market and companies downsizing or folding on a daily basis, most experts are now recommending a minimum of six months cushion.
Most Americans are not prepared
A recent survey shows that 64 percent of Americans would not be able to handle an emergency of even $1,000 without turning to some kind of credit. With the majority of consumers living paycheck-to-paycheck, how is one supposed to build that kind of a financial cushion?
Make saving a habit
The best way is to start small and stick to it. The idea of putting away six month worth of expenses can seem daunting. Most people have a better chance of sticking to goals if they start small and keep them manageable. Then, when the fund grows, the fruits of that effort will inspire tenacity and larger goals.
Begin with a savings account. The interest is small, but they are simple to maintain and often are cost-free in conjunction with a checking account. Start by putting away a small amount, say $25, out of each paycheck. Soon that will become a habit and the the $25 won’t even be missed. Then consider upping the amount.
Seek higher interest
As the fund grows, it becomes prudent to transfer it to a money market or CD, where the money will earn higher interest and start to work for you. Because of the volatility of the stock market, however, it is best to avoid stocks or mutual funds.