Most people are one paycheck from financial disaster. Do you know why?
The savings rate in the United States today is at a negative - meaning we spend more than we make. It wasn't always the case. In the 1970s, our savings rate was an eye-opening 10 percent. It's been declining ever since. For most of us, any interruption in the household cash flow would hamper our ability to pay the bills.
Many experts suggest one of your financial priorities should be to build an emergency fund, an additional three to six months' living expenses that you put aside for a rainy day. These funds shouldn't be touched and must be readily available if the need arises. We're not talking about everyday needs but real emergencies, such as the loss of a job or a spouse getting sick and your medical insurance not being able to cover the cost of treatment. If you don't have a fund set aside, you'll have to rely on either a credit card or a line of credit to pay those expenses. Either way, you're going to pay interest that you wouldn't if you had an emergency fund. Over an extended period, this will cost you a great deal of money.
So where does the three to six months' living expenses figure come from? Human resource experts suggest that it will take you one month to find a job for every $10,000 in salary you're looking to earn. If you were middle management earning $60,000 a year, that would translate into a six-month job search.
Since you are supposed to be saving your emergency fund for a rainy day, you of course want to have this money invested in something that offers not only a decent rate of return but also some liquidity, so you can convert the funds back into cash when the need arises. Having the money sit in your checking account is not a wise idea: most accounts offer zero or close to zero interest. Your savings account doesn't offer a whole lot more. Besides, both of these accounts are for everyday spending, so you may be tempted to tap into your nest egg for something less than an emergency.
Instead, try an investment vehicle that offers a higher return on your money than either your savings or checking account in exchange for slightly less liquidity. These options include:
Of course, building up even three months' worth of emergency money may seem daunting, especially if your family is on a tight budget. It takes discipline to find *additional space in your monthly finances[Your Budget]. But there are ways to do it. Your annual tax refund is an excellent way to kick-start your emergency fund. You might augment that by either working a second job or drastically reducing your spending for a couple of months. You can also top up your fund with the proceeds from a family garage sale.