Competitor: This article comes from Ilyce of Equifax Blog.
Entry Category: PF Olympics Finals
Too many American consumers have found themselves surprised by an emergency and caught in a very tough financial situation. Building an emergency fund should be everyone’s new financial priority because you never know when the bad times are going to show up, or just how awful they’ll be.
Your car could need a new battery, after years of running fine. Your child might need to see an out-of-network medical specialist and only 20 percent of the bill will be covered by your health insurance. Or, you might need to fly out for an unexpected family funeral.
Of course, the number one reason to have an emergency fund is to keep the lights on and food on the table in case of dire circumstances, such as a job loss and long-term unemployment. No one ever thinks they are going to be unemployed for a year, but the Great Recession has taught us folks who lost their jobs commonly find that they are unemployed for six months to a year–the longest stretch of unemployment in decades.
I’ll admit it: it isn’t much fun to save money. It’s fun to go out to dinner, see the latest films and buy new clothes. But saving enough cash to carry you through the bad times has become a greater necessity.
Here’s the good news: once you start saving those pennies, nickels and dimes, and you watch the dollars grow, there’s no better feeling.
Here are some of my best tips for building your emergency reserve fund.
1. Create an emergency cash fund that plans for the worst.
Some experts recommend you have at least 6 months of living expenses in case you get fired. In our current post-Recession economy, you may want to set aside even more. For high-income workers, it may take 2 years to find a job. Would you be able to survive in the meantime? Aim to finance an entire year with your emergency fund.
2. Cash is king.
Your liquid cash has to be safe and accessible (putting it under the mattress is out). Try to have 3 to 6 months of cash in a savings or money market account so you can get to it easily and quickly. You could keep another 6 months in a CD, but even those aren’t earning much, if any, interest these days.
3. Pay yourself first.
Set up automatic monthly transfers to savings, this way you won’t even miss the money. If you use coupons or find a great 50 percent off deal, look at your receipt for how much you saved and put that amount into your piggy bank.
4. Turn pennies into dollars.
Today, there are jars that count up your coins for you, but I’ve been throwing my spare change into the same glass jar for the last 20 years. If there’s a day you aren’t carrying any coins, super charge your savings by adding the lowest denomination bill in your wallet.
5. Pay off your debt.
Before 2007 this might have been number one on your financial goals, but priorities have shifted since then. That said, you’ll never be able to truly save if you’re paying off debt.
Make a list of each non-deductible debt you have and how much you’re paying in interest on the debt (A mortgage is deductible, if you itemize on your federal income tax return; credit card debt is not deductible). Organize these so the debt with the highest interest rate is at the top. While making at least the minimum payments on all of your debt, throw as much cash as possible toward the debt with the highest interest rate. Once you pay that off, move onto the debt with the next highest interest rate. Throw as much as you can toward that debt – including the amount you’re no longer paying toward the debt you just paid off – and so on, until all of your debts are paid off.
By following these steps toward building a year’s worth of emergency savings, you’ll be able to have piece of mind in knowing whatever the economy throws your way, you’ll be able to weather it.
The Equifax Finance Blog http://blog.equifax.com/ features daily insights and practical information from top consumer finance experts and guest bloggers, including award-winning real estate journalist, writer and author, Ilyce Glink, who serves as managing editor. Equifax subject matter experts also cover select credit-related topics. Practical information, insights from industry experts and answers to your personal finance questions all in one place—the Equifax Finance Blog.