Here is an interesting statistic for you. In a recent survey conducted by the Federal Reserve Board, families in America ranked saving for an emergency as the second-most-important reason to put money away. As you might have guessed though, our actions are not matching our words on this one: The Fed also shows that savings by U.S. households are on the decline over the last few years. Before you chime in about the state of the economy and the price of gas and all that stuff, note that the survey actually measured savings as a percentage of disposable income. No excuses.
Scarily, most Americans say they would fall behind on their mortgages, rents, or other bills if they were to miss just one paycheck. Do not find yourself among that majority. Hopefully, the following advice can help you save for a rainy day (if not a downright stormy one).
Save enough for 3-6 Months Of Reserves. A good emergency fund contains three to six months’ worth of salary. If you are self-employed or have an erratic income, do yourself a favor and save even more. Make sure you put away enough to cover rent or mortgage, car expenses, all bills and groceries, and the amount of your health insurance deductible.
Tips For Saving Money
Save Regularly. No doubt your bank account has one of those handy auto-saver options. Use it. Make sure a fixed amount of each paycheck is going into your savings account, and then increase the amount if you get any unexpected money – an inheritance, a gift, a bonus, etc. If you put a twelfth of your income toward the emergency fund, you will have saved a month’s pay in just one year.
Save Where You Access To Your Money. Make sure the money is saved somewhere that you can get to it quickly if the unfortunate should happen. A high-yield savings account is ideal in this regard. A money-market mutual fund typically will get you a better rate of return, but it is not insured. A CD is not advisable, because you would have to sacrifice a nice percentage to withdraw your money early. Why gamble? Talk to a financial planner before investing any substantial amount of your money in anything.
Save Wisely. Once your rainy-day fund is up and running, check in on it once in awhile. As you do things such as purchase a home or have children, you might naturally find that your income must increase to support these things. It is advisable to find a higher-paying job to cover these expenses, rather than dipping into your fund. Once you are making more money you can also add a little more to your savings each month, too.
If you find yourself in a spot in which your rainy-day savings cannot cover a major emergency, a home equity line of credit is the next-best thing. As with any loan, though, make sure to shop around for the best rates and terms.
Hopefully that big emergency will never materialize, but if it does… well, better safe than sorry.
Josh Michaels is a freelance writer who survives on very little income and carefully considered financial decisions. This combination has allowed him to have fun, travel the world, and start a retirement account – all without the pleasure of holding a full-time job.
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