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Tips
for Building a Rainy Day Fund
Experts have always advocated the need for a rainy day fund. But
with gas and food continually rising, there's yet another reason
to beef up your emergency fund. Without one, you are financially
vulnerable if you're handed a pink slip, major repair bill, or medical
crisis (CNNMoney.com Aug. 7).
More than one-third of Americans —roughly 76 million adults—don't
have any non-retirement savings at all, according to the National
Foundation for Credit Counseling's 2008 Financial Literacy Survey
results, released in April. And of those who do have a cash fund,
57% don't have enough in it.
Having sufficient cash on hand translates to having a special form
of insurance policy against financial calamity. Take steps to protect
yourself and gain peace of mind:
- Track
spending. Ideally, write down every expense for three months,
or one month at a minimum. This gives you a fairly good estimate
of average monthly expenditures for housing, utilities, gasoline,
groceries, and dining out. For periodic fixed expenses such as
insurance, vehicle registration, or property taxes (if not included
in your mortgage payment), calculate the monthly cost and include
that in your calculations.
- Identify
spending leaks. After tracking where your money goes, identify
expenditures you could cut out--or cut back--to boost emergency
savings. Some examples may include daily lattes, online shopping,
or dining out. Freeing up found money can boost your savings in
the short run.
- Calculate
desired reserve. The general rule of thumb--three to six
months of living expenses--may not be right for you. Consider
how stable your income is, whether you have another salary in
the household to fall back on, whether you must rely heavily on
bonuses or commissions, and the age of your vehicle and major
appliances. If you hear rumblings of a merger or downsizing, cut
back sooner rather than later to cushion a possible blow to your
income.
- Keep it
safe and liquid. Remember that beating inflation isn't the
main objective here, so don't expect a high yield on liquid savings.
Your goal is to have ready access to cash so you don't have to
lean on credit to get through a financial hardship. Telesis Community
Credit Union can help you choose an account that's right for you.
- Bite the
bullet to beef it up. To build a reserve quickly, cut back--or
temporarily halt--your retirement savings just down to the level
of getting your employer's full 401(k) match. (Remember that this
will temporarily raise your income taxes.) Stop making extra payments
on low-interest loans for a while, and redirect spending leaks
to your emergency fund.
- Resist
the temptation to raid it. Use the funds only for unbudgeted
necessary expenses, and keep feeding the fund regularly.
Follow these steps and you'll be on your way to a more secure financial future.
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