Released August 10, 2009
DECORAH, Iowa – “High unemployment rates and a slowing economy are causing many to question the future of the their jobs,” commented Erin Ludwig, Iowa State University Extension Family Resource Management Program Specialist. Developing an emergency fund to deal with unexpected events such as job loss, can help ease the pain in the event you are faced with such emergency.
By setting up an emergency fund, you protect yourself from the unknowns such as losing your job, car breaking down, breaking your arm, etc.). Without this reserve, you may be tempted or forced, to go into debt—debt that may take you years to pay off and cost you much more in the long run. Having an emergency fund gives you options to handle life’s unexpected events.
How much savings is enough for an emergency fund?
Some financial experts recommend increasing emergency savings to as much as 8 to 12 months' expenses during a recession, compared to 3 to 6 months' expenses during better economic times. The amount will depend on your personal situation (job security, income level, needs). Some of this money should be kept in liquid accounts, such as a money market fund, while other funds could be tapped from a low-interest source such as a home equity loan.
How do you get started?
One of the easiest ways is to make your savings automatic. Check with your employer and bank or credit union about direct deposits or transfers from checking to savings. You could also try saving a small amount each week and make deposits into your savings account. You could also try saving every $5 dollar bill or even all of your change.
If your company and/or industry sector (e.g., retailing) are "shaky," you need to build a big emergency fund quickly. Slash your spending and start saving aggressively. Talk with your family about the need to spend less and save more. Then challenge family members to be as frugal as possible and celebrate their successes with inexpensive rewards. Plan free entertainment activities such as picnics in a park, DVDs borrowed from a public library, and "potluck" dinners with family or friends instead of eating out.
If you've been saving money in tax-deferred college and/or retirement savings accounts, consider suspending your contributions temporarily and redirecting the money to build up your emergency fund. Put this cash in liquid assets such as a money market account or short-term certificate of deposit. If you lose your job, you'll have money readily available to pay your bills. If your job is spared, you can always use this money later for college or retirement.
Your emergency account should be easily accessible, just not too accessible. Financial institutions offer a variety of savings accounts, such as passbook savings, money market funds, and short-term CDs, which work well for emergency savings.
Cutting expenses is important when there is uncertainty about one's income stream. Examine monthly expenditures to see where spending can be trimmed. If you are buying a vehicle with a current outstanding loan balance, it may be necessary to consider eliminating the loan payment by selling the vehicle. Unless the outstanding balance is greater than the value of the vehicle, using the difference between sales price and loan pay-off to purchase a less-expensive means of transportation is an option. It will be easier in the future when your income is more secure to upgrade to a newer vehicle rather than allowing late payments to bring down your credit score, resulting in less borrowing power.
The most important thing is to get started now. For additional information about the benefits of saving, visit the America Saves Web site at http://www.AmericaSaves.org.
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Source: Erin Ludwig, eludwig@iastate.edu, 563-382-2949
